Pre-owned Assets Tax
The pre-owned assets tax (“POAT”) was introduced in the tax year 2005/06 and levies a charge to income tax on some previously successful inheritance tax planning schemes. The purpose of this note is briefly to outline some of POAT’s main features and to provide a rough guide as to the circumstances when this complicated tax might apply.
A basic principle of inheritance tax is that if you give assets away, but continue to get some benefit from them, the gift is ineffective for inheritance tax purposes – the “gift with reservation of benefits” rules. These rules are fairly all encompassing, but over time various planning methods evolved to get around them. Although it would be possible to block these “loopholes”, they are instead countered by POAT.
POAT has two remarkable characteristics, one is that income tax is being used as an anti-avoidance measure for inheritance tax planning; the other is that it affects all transactions entered into since 17th March 1986. It thus mixes up the income tax and inheritance tax regimes, and is retrospective.
The main points to look out for are as follows: -
* It can catch transactions entered into since 17th March 1986.
* POAT applies principally to transactions involving land and chattels – tangible assets – as these were the assets people commonly sought to give away, but retain some benefit from. It can also apply to intangible assets held in trust, but this note focuses only on POAT’s application to tangible assets.
* POAT does not apply to “pre-owned assets” which are treated as still belonging to the taxpayer because of the gift with reservation of benefits rules, or to assets for which a market rent is paid.
* POAT applies where an individual: -
(i) occupies land, or has the use of chattels; and
(ii) has either;
* disposed of the land/chattels now being occupied/used; or
* directly or indirectly contributed cash or other assets to buy the land/chattels now being occupied/used.
* If POAT applies then, put very simply, a charge to income tax will be levied as follows: -
(i) on the rental value of the land; or
(ii) in the case of chattels, based on 5% of their capital value.
* Any rental already being paid under a legal obligation is set off against the amount that is subject to POAT.
* If the total sum chargeable to POAT is less than £5,000, it is exempt. However, if it exceeds £5,000 by even £1, the whole amount will be taxable. If the taxpayer is a higher rate taxpayer the rate of tax will be at 40%.
* Taxpayers had until 31 January 2007 to elect whether to opt out of the POAT regime, but whilst this would save POAT, the assets in question would then be treated as forming part of the taxpayers’ estate for inheritance tax purposes.
The rules are extremely complex, and this is only a brief outline of the main points. Many transactions that had nothing to do with inheritance tax planning may also be caught by it – for example, arrangements between cohabitees buying property together and intra-family equity release schemes.
