What to do if a co-owner loses mental capacity

Many properties are held jointly.  Often two people are registered at the Land Registry as the legal owners.  That does not necessarily mean that they are each entitled to half the benefit of the property.  As a legal owner the person is a trustee, with responsibilities to hold the property for those who are entitled to its benefit – the beneficiaries.  That said, normally the registered owners are both trustees and the beneficiaries.

If one of the registered owners becomes unable to sign the transfer form, the property cannot be sold, as both trustees should sign the transfer form. Most properties are held informally and so there is no trust deed that gives the remaining trustee the power to remove the disabled trustee and appoint a new trustee.  As such a replacement trustee should be appointed under section 36 of the Trustee Act.

As the usual situation is that both registered owners have some entitlement to the property, it is often the case that a new trustee cannot be appointed without an application to the Court of Protection.

Before the Court of Protection can allow a new trustee to be appointed, it will need evidence that the disabled person is incapable of acting.  Obtaining that evidence can be difficult, owing to confidentiality issues or their medical condition not being clear.  In applications where the issues are not presented clearly to the Court, the process can become protracted and expensive.  It is therefore best to make sure before making an application that all the proper evidence is submitted and if possible agreed.

If there is insufficient evidence as to person’s medical condition, it may then be necessary to take an application to a different court under section 41 of the Trustee Act.  This involves a different and more complex process requiring different evidence.

If you require a brief discussion as to your options, please contact our Court of Protection team 0207 940 4000.

Inheritance tax and joint bank accounts

The taxation of money in joint bank accounts is dependent on who owns it. It is not uncommon for joint bank accounts to be set up just for convenience when an elderly person is struggling to manage their affairs.  In these circumstances, the money will be treated and taxed as if belonging to the person who paid the money in.

H.M. Revenue & Customs (HMRC) will normally treat accounts, where the person who paid in the money is able to draw out the whole account, as the paying party’s money.  As such all of that money will be taxable on death as set out in section 5(2) of the Inheritance Tax Act 1984 (IHTA 1984).

There is a subtle difference between the above scenario and the case where an account is set up as a joint account and hence the account passes to the surviving account holder on death.  Some banks will pay out the whole account to the surviving party. In these circumstances inheritance tax (IHT) is payable by the person who receives the money, rather than by the executors, unless the Will provides otherwise. Whilst HMRC may go against the executors if the money is not paid, they will first pursue the joint account holder.

There may be problems if it is intended that only part or half the monies in the account pass over to the non-paying account holder on setting up of the account.  People may wish to have this result, if they are to take advantage of the IHT potentially exempt transfer rules, which after seven years mean that IHT is not payable.

However, the HMRC are reluctant to accept that the gift was made unconditionally before death. Often, as in the case of Matthews v HMRC [2012] UKFTT668, HMRC will not accept that part of an account was transferred and hence is not liable to IHT.  In that case, the court held that section 5(2) of the IHTA 1984 applied because Mrs Matthews remained free to withdraw any of the monies. She had a reservation of benefit in all the monies hence the whole sum was liable to IHT. You cannot have your cake and avoid tax on it.

* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*

The ownership of joint accounts on death

Joint accounts are a practical and cheap way of paying an elderly relative’s bills, when that person is struggling to manage their affairs.  They have the advantage of being much quicker and cheaper to set up than registering a lasting power of attorney or obtaining a deputyship order.  A further advantage is that they do not always cease on death, hence ongoing bills can be paid without substantial delay.

Against these obvious advantages, there are some serious problems that frequently arise.  These include confusion as to who owns the money in the account, how that money will be taxed for inheritance tax purposes and inconsistencies on how banks treat joint accounts on death.

Ownership of the money in the account might belong 100% to one account holder or alternatively the other, or something in between.

Accounts which are fully joint accounts pass entirely to the survivor.  Accounts where there is a clear intention that the money should be held in certain percentages will remain in those separate shares – as tenants in common.

In most accounts, the correct presumption is that the accounts were only set up in that way for administrative purposes and belonged entirely to the person who paid the money in.  This is called the presumption of a resulting trust. This complexity and uncertainty have unsurprisingly led to numerous court cases between family members and also HMRC, who will want to tax the money on the paying party’s death.

The presumption of the money belonging to whoever put it in (resulting trust), is hard to overcome. The case of re Northall (deceased) [2010] EWHC1448 (Ch) is a recent case which confirms this as a standard approach.  Other cases, will, however, turn on evidence as to what the investing party intended.

What then is sufficient to rebut the presumption of a resulting trust?  The presumption of advancement (e.g. – a parent naturally wanting their money to go to their child) is weak and shortly to be abolished by the Equality Act in 2010. In the case of Northall, even the wording of the signed mandate that the money should pass on death was not sufficient.  The court are often reluctant to rely on small print and, especially where the investor is elderly.

The case of Drakeford v Cotton and Staines [2012] EWHC1414 (Ch) is one where the court did allow the money to pass to the other joint holder.  The latter case was decided on direct evidence as to what was intended.

A further frequent problem is that if the accounts have been set up by elderly relatives then, there can be a challenge as to whether that person had capacity, or was perhaps unduly influenced to set up the account.

It is, therefore, advisable to be clear as to what is intended. This can be through a Will, or better still a lasting power of attorney or deputyship.

Taking advice avoids the future expense, uncertainty, disputes and possibly tax. Taking advice avoids future expense, uncertainty, disputes and possibly tax. How the money should be taxed is detailed in my next blog, please click here for more information.