In AJ Bingham v HMRC [2013] TC02528, a family tax planning exercise involving joint bank accounts which were designed to save Income Tax failed. HMRC unexpectedly invoked the Settlements anti-avoidance rules.

Joint income: splitting income within the family

  • Mr Bingham, a solicitor opened joint bank deposit accounts in the name of himself, his wife and his children (upon their reaching majority).
  • Each was a signatory on the accounts.
  • Mr Bingham controlled the cheque books but the children knew where they were kept and had written cheques on odd occasions.
  • Interest was earned and for tax purposes he initially split the interest equally between account holders.
  • In later years he apportioned sums to each account holder for tax so as to enable them to make use of their personal allowances and of the lower rate tax bands.
  • The amounts apportioned in this way varied from year to year according to the individual circumstances of the account holders

HMRC investigated his Self Assessment return and assessed all the interest on Mr Bingham on the basis that he had created a settlor interested trust.

Discovery assessments were raised for 14 years and penalties of 30% applied.

The taxpayer said that he had created joint accounts and so each account holder held a beneficial interest in the account and was therefore assessable on their own share of interest proportionate to their holding. Further, under the joint property rules joint income of married couples is taxed 50:50.

The joint property rules

Under the Joint property legislation (s.836 ITA 2007, and s.282 ICTA 1988 for earlier years), property held by spouses in joint names is taxed by default 50:50 unless one spouse has no beneficial entitlement to the income or the parties make a joint property election and elect for income to be assessed in proportion to their beneficial interests.

The Settlement provisions

Under the Settlement provisions (s.619-s.626 ITTOIA 2005 and s.660A+ ICTA 1988 (for the earlier years) income arising under a settlement during the life of the settlor is treated for Income Tax as his income and not as the income of any other, unless the income arises from property in which the settlor has no interest.

A settlor is treated as having an interest in property if that property or any derived property is, or will or may become, payable to or applicable for the benefit of the settlor or his spouse in any circumstances whatsoever.

A person shall be deemed to have made a settlement if he has made or entered into the settlement directly or indirectly, and, if he has provided or undertaken to provide funds directly or indirectly for the purpose of the settlement, or has made with any other person a reciprocal arrangement for that other person to make or enter into the settlement.

There is an exemption that allows a settlor to make outright gifts of property to their spouse but if the settlor remains interested in that property, the gift is ineffective for Income Tax.

The decision

The First Tier Tribunal (FTT) reviewed the facts and decided that:

  • Mr Bingham alone had deposited the funds into the bank accounts so he was the settlor of a settlement.
  • He retained de-facto control of the bank accounts and so there was no transfer of beneficial interest in the funds to other family members. He had created a settlement in which the settlor retained an interest.

Discovery assessment: on the basis of information available the circumstances were that HMRC was able to make a 'discovery' of the tax shortfall. No discovery was possible without a finding of negligence or fraud on the part of Mr Bingham and the FTT decided that none existed. The FTT found that the tax issues were technical, it was rare for HMRC to investigate jointly declared bank accounts and apply the settlement provisions and so it was not negligent of Mr Bingham to be unaware of their effects. HMRC's guidance on joint income was also found to be less than clear.

The FTT also set aside penalties. This left the taxpayer with five years of assessments.

The FTT was also anxious to ensure fairness. Tax had already been assessed on some of the family members and so it requested that HMRC take this into account so as to prevent double taxation.

Comment 

The Settlement provisions never cease to baffle taxpayers, so an interesting case for tax enthusiasts, but was it decided correctly? In the earlier case of Prof AK Halpin v HMRC [2011] TC01359 which also concerned joint bank accounts, the FTT decided that the absence of any indication to the contrary, the beneficial interests in a joint account held as between husband and wife are assumed to be equal. In Halpin, however, HMRC did not argue for the application of the settlement provisions.

In Mr Bingham's appeal there was no mention of the exemption from the settlement legislation for outright gifts to spouses. So, was there really no transfer of beneficial interest in the bank balances, not even to the spouse? The FTT clearly thought not. One wonders how many husbands and wives you know who have joint bank accounts but where one holder might on closer examination deposit all the funds and be deemed to have de-facto control?

What was plainly lacking in Mr Bingham’s case was documentation, unusual for a solicitor but not unusual for a family. For example, a declaration of trust would have put the matter beyond doubt as to who was intended to be the beneficial owner of what. It would have been safer still to create a separate bank account for each beneficiary. Retaining so much control over the bank accounts of others is going to lead to accusations of settlor-interest, but it appears to be not always noted by HMRC. Spouses need to be careful: holding a bank account in joint names may lead one to think that interest will be taxed 50:50 but it seems that it does not automatically confer equal beneficial interests.

Links

Joint property rules
What are the different rules for joint property owners? How is joint property taxed?

Settlement provisions
What are the settlement provisions? How do they work in families and with married couples and civil partners?

External link

A J Bingham v HMRC [2013] TC02528

 

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