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The ‘pre-owned assets tax’ (POAT) is an income tax charge levied on the ‘benefit’ earned on any property that has been given away (or sold for less than its full value) but of which the former owner still enjoys the use.

The charge also applies if the owner gives someone the funds to purchase a property, or an interest in it, or owned another property which was sold, and the proceeds gifted to buy the property. The charge will not apply if there is a gap of more than seven years between the gift and the purchase of the property.

The benefit is calculated by reference to the property's rental value, i.e., the rent that would have been payable if it had been let to the taxpayer at an annual open market rent.

There is a ‘de minimis’ amount of £5,000 per tax year per spouse/civil partner, but it is not possible to transfer any unused exemption from one partner to the other.

Note:

1. Either the gift with reservation of benefit (GWRB – see Tips 81 and 82) or the POAT rules could apply where a donor has gifted property but remains in residence paying no or minimal rent.
2. If the POAT rules apply and it is not viable to meet the ongoing income tax bill but there is less concern about the eventual IHT bill, an election can be made to apply the GWRB rules instead of the POAT.
3. It may not always be preferable to pay market rent to avoid the POAT charge, e.g., if the donor pays tax at a lower rate than the recipient of the gift, the tax bill will be lower under the POAT rules than if the recipient pays tax on the market rent. Also, the donor will only need to find the money to pay the tax and not the full rent.

Pre-Owned Assets Tax
Scenario 1

David gives his son, Jim, £250,000 which he spends on acquiring Greenacres. David moves into Greenacres and will be subject to the POAT charge as from that date.

If the market rent of the property is £4,995 per annum and no rent is paid, there will be no POAT charge as the market rent is less than the ‘de minimis’ limit.

If the market rent is £10,000 per annum and David is contracted to pay a rent of £5,000, the full £10,000 will be subject to the POAT charge but with a reduction for the rent paid.

Scenario 2

David moves into a house that Jim had bought with his own money. David gives Jim funds for improvements. There will be no POAT charge because it is not David’s money that has been used to acquire the property.

Scenario 3

David decides to move to Spain and, after selling his property in England, he gives Jim £200,000. Jim used this money to purchase a property. David is now in bad health and returns to England to stay with Jim for three months of the year.

As Jim originally used the money gifted by David to purchase the property, the contribution condition is met during each period of occupation and it will be a question of fact whether David will be seen to be in occupation during the remaining nine months. If, for example, he has a room set aside for him then he will be deemed to be ‘in occupation’ for the whole year and be subject to the POAT charge.