Dormant accounts seem to represent the closest thing to a ‘free money tree’ that charities could wish for, but they pose some issues, writes Jerry Jamieson
Since 2011, over £600m has been given to charities and good causes through a scheme that precious few have heard of – and some of that money may unknowingly be yours.
The ‘Dormant Accounts Scheme’, which was set up by the Government through the ‘Dormant Bank and Building Society Accounts Act’ in 2008 (and became fully operational in 2011) is a scheme through which participating banks and building societies can donate funds from ‘dormant accounts’ to charity, via a government intermediary.
Dormant accounts are UK Bank and building society accounts which have lain untouched for 15 years, and for which the bank or building society has been unable to trace the owner.
Money held in these dormant accounts with participating institutions (which include all major UK high street banks and building societies) is transferred to the government intermediary on an annual basis, with over £1.2bn having been identified and handed over to date.
So has the UK government really adopted a policy of wide scale asset seizure? The reality is less sensational. Should the rightful owner of any account which has had its contents donated after being deemed ‘dormant’ identify themselves, they will be entitled to a full refund of any money donated – indeed, out of the aforementioned £1.2bn handed over to date, more than £450m of this has been reclaimed by rightful owners.
The scheme has been so successful that a full expansion blueprint was published on 4 April 2019 by a government-appointed taskforce comprising four ‘industry champions’. The proposed expansion would extend the scheme beyond cash accounts, to include unclaimed proceeds from life insurance and pensions products, as well as dormant holdings in investment funds, shares, and bonds.
‘What’s the problem then?’ one might ask. These dormant accounts seem to represent the closest thing to a ‘free money tree’ that charities could wish for. The ‘problem’ relates to tax – namely two issues faced by HMRC relating to how any reclaims should be taxed – the answers to which are still unclear.
If a refund claim is made by the heirs of a deceased owner of a long-dormant account, is inheritance tax payable on any refunds received?
The intuitive answer would seem to be ‘yes’. The heirs have become entitled to the money in the account solely by virtue of the deceased’s death. But the money is not being transferred from the deceased to the heirs.
Instead, the money is transferred from the deceased to the government intermediary, and then potentially onto a charity. The heirs’ claim for a refund is funded from a separate pot set aside by the intermediary for refund claims.
HMRC have not yet issued any guidance on this point – though it is interesting to note that the four ‘industry champions’ appointed by the government do not consider that any inheritance tax should be payable.
Capital Gains Tax
The proposed expansion of the scheme extends the ‘dormancy’ rules to non-cash assets such as holdings in shares and bonds.
Dormant non-cash assets would need to be sold without the account holder’s instruction in order for the proceeds to be transferred to the government intermediary. It is thus arguable whether those who reclaim their assets should have to pay capital gains tax if these assets had risen in value during their 15-plus years of dormancy.
The owner may have wished to continue to hold the asset: would it be fair to tax them on an entirely involuntary sale? Equally, would it be fair on the public to let the owner retain the entire increase in value tax-free?
Should the proposed expansion take place, it will be interesting to see which stance HMRC take.
Noteworthy is the stance of the ‘industry champions’ behind the proposed expansion, who suggest that capital gains tax should not be charged in such circumstances.
The two tax complications highlighted above will doubtless cause HMRC a headache as the scheme continues to expand, and a greater proportion of potential tax revenue flows through the scheme uncollected.
One disclaimer: should HMRC conclude that neither inheritance tax nor capital gains tax is payable on refunds through the dormant accounts scheme, this is unlikely to unleash a torrent of high value refund requests for accounts which have mysteriously been forgotten about. Anti-avoidance laws will continue to halt any such deliberate ploys to avoid tax which are against the spirit and intention of the legislation.
Jerry Jamieson works at boutique private wealth law firm Maurice Turnor Gardner LLP.