New Pre-owned Asset legislation - Everyday Law Summer 2005

01 July 2005

Many taxpayers will have been affected by the Finance Act 2004, which introduced the new ‘Pre-Owned Assets’ income tax charge. The new charge came into force from the 6th April 2005 but will have retrospective effect running back to 17th March 1986.

In short, the new regulations provide for an income tax charge on UK residents who enjoy benefits derived from pre-owned assets. The applicable rate of tax is either 22% or 40% depending on the individual taxpayer.

Most commonly, the charge will apply to an individual who occupies land or is in possession of a chattel and triggers either the ‘disposal condition’ or the ‘contribution condition’ as outlined below:

Disposal Condition

This will arise if, after the 17th March 1986, an individual disposes of all or part of their interest in land or chattels to another person, but continues to use and derive a benefit from the land or chattel that has been disposed of. This may relate to a person who has gifted a property for Inheritance Tax purposes or in order to limit exposure to care home fees.

Contribution Condition

This condition will be triggered if, after the 17th March 1986, an individual has directly or indirectly provided the consideration given by another person to acquire an interest in land or chattels, or alternatively, has gifted a property - the proceeds of which have subsequently been used to acquire a new property for the person having made the original gift.

Exemptions

An individual will be exempt from payment of the new ‘Pre-Owned Asset Charge’ if they elect for the property they have gifted to fall back into their estate for Inheritance Tax purposes – such an election needs to be made by 31st January 2007. Alternatively, if the gift initially constituted a ‘Gift with Reservation of Benefit’ and is already in the individual’s estate for Inheritance Tax purposes, no election need be made.

The terms of the regulations are far reaching and in future articles we shall analyse how they affect, in particular, those taxpayers who may have entered into one of a variety of ‘home loan’ schemes that were promoted by certain lawyers, accountants and financial organisations in recent years.

For more information please contact Aaron Spencer, Partner.
 

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