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Tax Follows Source of Funds, Says Tribunal
When a bank account is held in the names of several people, the interest earned on the account normally ‘belongs’ equally to all of them. Does that mean that the tax liability on the interest is shared?
The answer is no, as a recent tax case shows. When a solicitor organised his affairs such that he, his wife and (at different times) all three of their children had rights of signature over a bank account, the family all declared ‘their share’ of the interest earned on their respective tax returns.
However, HM Revenue and Customs (HMRC) disagreed with this treatment, arguing that since the funds in the account were all supplied by the solicitor, the legal position was that of a settlement into trust.
Unfortunately for him, the Income and Corporation Taxes Act 1988 (which applied in this case) provides that ‘Income arising under a settlement during the life of the settlor shall be treated for all purposes of the Income Tax Acts as the income of the settlor and not as the income of any other person’ and also that ‘A person shall be deemed for the purposes of this chapter to have made a settlement if he has...provided or undertaken to provide funds directly or indirectly for the purpose of the settlement...’.
The relevant statute has changed over the years, but the effect remains the same.
The outcome was that the First-tier Tribunal confirmed that tax and interest of more than £200,000 was due to HMRC. HMRC’s claim for tax geared penalties was disallowed.