Election Time! Pre-Owned Assets Tax

13 December 2006

Now that we have got over the shock of the Inheritance Tax treatment of trusts shake-up from the 2006 Budget we can turn our minds back a couple of years to the introduction of Pre-Owned Assets Tax.

If certain conditions are fulfilled a liability to POAT can arise. The conditions are complex, and the rules relate to a benefit received not only from property, but also chattels such as furniture and paintings, and intangible assets such as shares.

Here are a few of the more general examples where POAT would apply. The list is by no means exhaustive:

• If you gift cash to someone who then within seven years purchases a property and you move into that property you may be liable to POAT. The same would apply if the property is sold and a replacement property purchased which you then occupy;
• If you gift cash to your unmarried partner who then uses it to fund the purchase of a property in his/her sole name, if you occupy the property you may be liable for POAT (even if you subsequently marry or register your Civil Partnership);
• A scheme – often known as the home loan scheme or the double trust scheme – whereby you take the value of your home out of your estate for inheritance tax purposes but you continue to live there;
• If you sell a share of your home to, say, your daughter, perhaps to release some cash for you, and you continue to live in the property you may be liable to POAT.

There are a number of exemptions from POAT. If you become liable, it triggers an annual charge which is calculated on a deemed rental value of the benefit of using the asset, regardless of the fact that you no longer own the asset. It is an income tax charge.

Liability to POAT must be reported to HM Revenue & Customs (HMRC) on a self-assessment basis – you will not be told by the Revenue whether or not you fall within the charge and so it is crucial that you take advice on any arrangements you make to ensure you are fully aware of all the tax implications. If you do not report a POAT charge you could end up paying penalties.

If you are affected by POAT one option is to make an election, the effect of which is to bring whatever gift you originally made back into the charge to inheritance tax in your estate, without having to pay the POAT charge.

If you were affected by POAT in its first tax year (2005/2006) the deadline for making the election was 31 January 2007. However, following the Budget on 21 March 2007 new legislation will allow HMRC to accept late elections, so you may still have time. We await the detail in the draft legislation. Before you submit your self-assessment tax return you should consider your POAT position with care because opting for the election has its own consequences. The decision should not be taken lightly, and you should obtain advice so that you can make an informed decision.

For more information please contact Sarah Bogard, Associate & Chartered Tax Adviser.
 

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