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Pre-Owned Assets Tax

While there has been a lot of recent press coverage on inheritance tax (IHT), we should not forget about pre-owned assets tax (POAT). This was introduced in April 2005, but the rules can affect arrangements going back as far as March 1986. POAT is an income tax charge on those who enjoy certain assets that they previously owned or provided funds to purchase. The charge can be relevant to chattels and certain trust arrangements, but this article deals only with property. There is insufficient space for a detailed examination of the technical rules, which are complicated.

In very basic terms, you may have a POAT problem if (1) you occupy a property and (2) either (a) you previously disposed of the property or (b) you provided funds for the purchase of the property. The rules can also apply if, for example, you contributed to the purchase of another property, which was then sold and the proceeds used towards the purchase of the property which you now occupy. There is no POAT charge if you own the property occupied by you. Condition (1) seems fairly straightforward, but there is more to “occupation” than< you may realise. HM Revenue & Customs are of the view that, if you store furniture and other personal possessions in a property, you may be occupying it. Condition (2) (a) is illustrated by the following example. Matthew owns a house worth £250,000 and has no other significant assets, so his estate is below the IHT threshold. In order to release some equity and keep the house in the family, he sells a 50% share to his daughter for £125,000 and continues to reside in the house alone. Matthew is caught by the POAT rules, as (2) (a) applies to the 50% share. Oddly, POAT would not have applied if Matthew had sold the whole house to his daughter for £250,000 or if he had sold a 50% share in the house to a commercial provider under an equity release scheme, due to specific exemptions.

Although the POAT charge was introduced as a result of a number of IHT avoidance schemes, this example shows that the rules can also apply where a transaction had nothing to do with IHT mitigation.

Condition (2) (b) can be illustrated as follows. In 2000, Helen gave £200,000 to her son, Luke. In 2003, Luke used that money to purchase a new flat for himself and his family. In April 2005, Helen moved in with Luke and his family. Helen will be liable to POAT. The result would have been the same if Luke had invested the money in shares, subsequently sold the shares and then used the proceeds to buy the flat.

Assuming the POAT charge applies, what is the rate? In the previous example, while Helen occupies the flat, she will be deemed to receive income equal to the notional market rent. So if the rental value in April 2005 is £10,000 per year, and Helen pays income tax at 40%, her liability for 2005/06 will be £4,000. However, if the rental value does not exceed £5,000, there will be no POAT charge. If Helen had given Luke £100,000 and he had borrowed the remaining £100,000, only half of the annual rental value (£5,000) would be attributable to Helen, so no POAT charge would arise. If the value exceeds £5,000, income tax is calculated on the full amount, not just the excess over £5,000. The annual rental value is determined when the POAT charge first applies and that value stands for the following five years, at which time a revaluation must be made.

Fortunately, there are a number of exemptions, illustrated as follows:

= In the example of Helen above, her occupation of the flat would not have given rise to a POAT charge if she had moved in more than 7 years after her original gift to Luke.

= Sophie gives her house to her adult son and remains living there. There is no POAT liability, but this is a “gift with reservation of benefit”, with the result that the house remains in Sophie’s estate for IHT purposes. If instead she were to give her son a 50% share and they both lived there, each paying their fair share of expenses, there would usually be no gift with reservation of benefit or POAT charge.

= Bob gives £200,000 to his wife, who uses the money to buy a holiday home for both of them to occupy. As this is a gift between spouses, there is no POAT liability. The same would apply to a gift between civil partners. However, if Bob had made the gift before the marriage took place, POAT would apply.

= Stephen transfers his house to his children, who grant him a lease of the property. Stephen pays a full market rent under the terms of the lease. He is not liable to POAT.

= Emma inherits a flat from her late aunt. Within two years of her aunt’s death, Emma signs a Deed of Variation passing the flat to her son. Emma’s subsequent occupation of the flat will not give rise to POAT.

There are other situations where the POAT charge does not arise, for example, if the property is part of your estate for IHT purposes or if you are resident outside the UK for tax purposes. If you are resident in the UK but not domiciled here, POAT cannot apply in respect of property outside the UK. Even if the POAT rules would normally apply, in certain circumstances it is possible to elect that the property or money transferred should instead be treated as back in your estate for IHT purposes. In conclusion, if you are living in a property that you do not own, you need to consider whether you may have a POAT problem (or, if not, whether you are caught by the IHT reservation of benefit rules). Under self-assessment, the onus is on you to disclose any relevant information in your tax return. The rules in this area are complex and you should obtain professional advice at an early stage.

For further enquiries please contact Stuart Goodbody (view full profile) on 01892 510000 or email stuart.goodbody@ts-p.co.uk.

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