When Grandma comes to stay

Melanie Christodoulou

Senior Associate

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May 11, 2017

Categories Elderly and Vulnerable ClientsTax and Wealth Preservation

Hidden tax regime – Pre-Owned Asset Tax (POAT)

It’s Sunday lunch at Grandma’s house and she tells you that she is selling her house as it is too big for one person ‘rattling around’ and she wants to be closer to the family.  She is going to move in with your mum (her daughter) and your dad when they purchase their retirement bungalow down by the sea.

Grandma also tells you that because she is going to be living there, she will contribute towards the purchase of the property with the cash released from her sale, especially as it means larger living accommodation is needed to accommodate her needs.

Grandma’s cash contribution to the property all seems in order.  She is not trying to hide anything.  She is merely making a cash gift to your mum.

Grandma correctly reasons that if your mum uses the money Grandma gives her towards the purchase of the property, that is mum’s choice and Grandma will not be caught by inheritance tax on this gift when she dies, if she survives the gift by seven years.

However, lurking in the background is a hidden little tax regime known as ‘Pre-Owned Asset Tax’ (also referred to as POAT).  This tax regime, introduced in April 2005 is barely known by the general public.

So how does it work?  Unlike inheritance tax, pre-owned asset tax is a tax on the notional rent receivable of a property.  You pay an annual income tax charge on its rental value.  The tax applies in the following situation:

  1. A person owns an interest in a property and then
  2. disposes of all or part of it; and then
  3. provides towards the purchase of another property in which they then occupy

In our scenario, Grandma will be caught by the above, because she is selling her property and contributing towards the purchase of the bungalow.

Pre-owned Asset Tax is an insidious tax regime.  However, if identified early enough, appropriate advice can be provided.

If your Grandma is selling her property to live with her daughter or son, (your mum, or dad) and contributing towards the purchase of the property, or is selling part of her property to a daughter or son, the message is clear; obtain legal advice.

For further information about making gifts and their tax implications, contact Solicitor Melanie Christodoulou on 01227 763939.