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.