Pre-Owned Assets Tax (POAT)
was introduced in the Finance Act 2004.
Ten years is a long time but, when it comes to tax statute, ‘age cannot
wither her’. This tax has teeth and is
capable of biting, not with a tax bill after death, like Inheritance Tax, but,
worse, with an annual Income Tax charge that can be a very real drain on cash flow
for the living. What is this beast? Read on.
Remedial action can require
the participation of elderly parents.
Another reason why, if you suspect a POAT problem, your clients must
grasp the nettle with all speed.
Imagine you get on very well with your parents. Your spouse is fond of your parents too (it
happens!). Your parents live a distance
away and they are getting older. You
can’t get to see them as often as you’d like and you wonder how well they are
coping with living on their own. If you
had them close to hand, you could keep an eye on them. They in turn would like to see more of you
(or is it the grandchildren?). Either
way, the perfect solution appears to be that they come to live with you. You’ll need a bigger house though and so six
months later you and your spouse are the proud owners of a new home for all the
family. You avoided having to get a
mortgage because your parents had the money to contribute £100,000 towards the
purchase price. It’s essentially a part
of your inheritance in advance, so it’s just you and your spouse as the legal
owners of the new home for all the family.
When your parents eventually manage to sell their own home, they move in
with you.
Arrangements like this are bound to become more prevalent. We have heard of the rise of the ‘sandwich
generation’ – a generation of people who care for their elderly parents as well
as look after their growing children.
Where the necessary love and trust exists between family members of different
generations, living together like this can make a lot of sense on many
levels.
However, unfortunately, it comes with the potential for a POAT
problem. In the case of property, POAT
applies where a person (who has to be a UK resident for Income Tax purposes)
occupies the property (which can be located anywhere in the world) and either:
- the person has owned an interest in that property in the past and disposed of all or part of it, otherwise than by an ‘excluded transaction’; or
- the person directly or indirectly provides any consideration used by another to purchase an interest in the property which is occupied by the person.
Families are often completely oblivious to the risk of POAT. However, the IHT compliance forms submitted
following a death ask some searching questions designed to identify POAT issues
and it can be at this stage, when it is too late, that a POAT issue is
identified and POAT arrears and interest become due.
The annual POAT charge is calculated with reference to the rental
value of the property occupied. If the
property would let for £30,000 per annum and the elderly parent contributed all
of the purchase price in the above situation, the
elderly parent would have an Income Tax liability based on that figure. Limited exclusions do apply and cash gifts
made before April 1998 or more than seven years before the occupation commences
are not caught. There is also a £5,000
rental benefit de minimis
exemption.
The workings of POAT in the context of land are rather subtle and
easily overlooked, often because the second limb (contribution) can be indirect
– the contribution can be of a different asset (not necessarily cash – maybe
another property), which is then used to fund the property that is
occupied.
It is difficult to generalise but be vigilant for any situation in
which a family member:
- continues to live in a property part or all of which they sold ‘not on arm’s length terms’ to a family member; or
- is living in a property in which they do not have a beneficial interest, or do not have a beneficial share commensurate with their financial contribution to the property.
It can be possible to do something about the POAT problem if
caught in time. For example, it is
possible to elect into the Inheritance Tax reservation of benefit regime
instead by the end of the January following the tax year in which the POAT
charge first applied (so if first application is in the tax year 2015/2016,
elect by 31 January 2017), or later at HMRC’s discretion. Alternatively it may be possible to
characterise the arrangement as a loan, or find that the contribution was in
fact an acquisition of a beneficial interest in the house – both of which avoid
POAT because the interest is still within the giver’s estate for Inheritance
Tax purposes, which may be better than an annual Income Tax charge.
