In what circumstances can the Pre-Owned Assets income tax charge apply? This month's Tax Clinic features a query on the potential application of these rules, which are aimed at discouraging certain IHT planning arrangements.
 Mark McLaughlin
The 'Charge to income tax on benefits received by former owner of property' is commonly known as 'Pre-Owned Assets Tax' (POAT) or similar. The rules were introduced in Finance Act 2004, with effect from 6 April 2005. They were broadly introduced to penalise certain IHT saving arrangements already undertaken by imposing an income tax charge, and to deter the future implementation of those arrangements considered to be effective for IHT purposes. The rules are not straightforward, and have the potential to catch 'innocent' transactions not necessarily intended to achieve an IHT saving. This month's query is on finding a satisfactory path through the IHT and POAT minefield. Query from TaxationWeb visitor ('stel') We would like to have transferred our primary home to our children, but the pre- owned asset rule has rendered this means of avoiding IHT ineffective. However we are in the early stages of selling our present home and purchasing another. We would appreciate an opinion as to the validity of the following method of circumventing the pre owned asset rule on the new home. From the proceeds of the sale of our present home we would make cash gifts (PET) to our children of sufficient funds to allow them to purchase outright our new home. We would then live rent-free in the new home, wholly owned from the date of purchase by our children, and thereby not a pre owned asset In seven years the PETs would no longer be considered part of our estate. The serious risks of being beholden to our children are fully appreciated (together with their eventual liability to CGT) but our other substantial assets ensure that such a risk would not be disastrous. Editor’s CommentsAs the responses to the query indicate, the POAT rules are far from straightforward. It can often be difficult to distinguish between gifts subject to the 'Gifts with Reservation of Benefit' (GROB) IHT anti-avoidance rules, or the POAT anti-avoidance rules. Fortunately, gifts cannot be 'caught' by both. Unlike with the GROB rules, cash gifts can be traced under the POAT rules, and are only excluded after at least seven years in the case of land and property or chattels (FA 2004, Sch 15, para 10(2)(c)). This is a difficult area of tax to understand and apply in practice. Specific professional advice is highly recommended. Forum responses included those reproduced below.Ian Martin Commented:I think the issue here is that you would still be benefiting from the cash gifts, so the Gift with Reservation rules would apply; ie the gifts would not fall outside your taxable estate - indeed, the value of the property at date of death would be used in the IHT calculation, unless you had previously stopped using the property (at which time the 7 year clock for a Potential Exempt Transfer would start). There are many ways of effective estate planning to mitigate IHT, particularly if you have other assets, so I would recommend taking advice from a professional who would be able to discuss the full range with you, having established a full picture of your circumstances. If I can be of help in this regard, or if you would like some further written material on Gifts With Reservation, POAT and Potentially Exempt Transfers, please do drop me a line. 'maths' commented:The GWR provisions do not apply to your proposal. However, the POA rules do. 'iandouglas' commented: I'm fascinated by you view that the POA rules would catch this!
How can cash be a pre-owned asset? If the questioners sold their house & gifted nothing to the kids who then bought a 2nd home that the parents happened to live in then plainly that would not be caught by POA rules. If the facts were that same except the parents gifted money from their other assets they mentioned to the kids then would that be caught by the POA rules? 'TN' commented:I agree with maths - there can't be a GWR, as you can't reserve an interest in cash. The POA rules do apply since the individuals will be caught under either/both the conditions in Sch 15 FA 2004. i.e. The chargeable person occupies relevant land, and previously owned other land, the proceeds of which were used to purchase the relevant land (Sch 15 para 3(2)). or The chargeable person provided the consideration for the acquisition of the relevant land (Sch 15 para 3(3)). I can't see that the transaction would be exempted under any of the conditions specified in Sch 15. If the parents are buying a smaller house I believe that they can gift their excess cash to the children as a PET. Or they can follow the route they've adopted and either pay rent or elect for the gift to be a GWR to avoid the POA charge. 'maths' commented:I think the name "pre-owned asset" is misleading. To be caught by it does not necessarily require that the asset was pre-owned! In the above query the reason the POA applies is because of the "contribution condition" ie the parents have given cash to the kids to buy a house for the parents to live in and thus the parents have "contributed" consideration (as TN comments para 3). The source of the cash is irrelevant. 'devon' commented:The above discussion has us worried. Some years ago we purchased a flat for use by our widowed mother. The purchase funds were entirely our own and were not gifted by our parent, and the flat is registered in our names. Our mother lives in the flat rent free. It is appreciated that when the flat is sold we will be liable for CGT, but will there be any liability for GWR or POA or other tax because our mother does not pay us rent 'TN' replied:devon - I can't think of any tax problems with your arrangement. Provided the funds didn't come from your mother and she didn't previously own the property or a property which it replaced, then there should be no GWR or POA problem. The property is in your estates for IHT purposes, and as you say there will be CGT to pay when you sell it (unless you qualify for any other reliefs etc). Also, since it's not let on a commercial basis you won't get any tax relief for revenue expenses you pay in relation to the property. -------------------------------------------------------------------------------- To view this discussion online (including any possible updates), go to:
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