Where a person has either disposed of an asset by making a gift or, in some circumstances, by selling the asset, and has contributed towards the purchase of a new asset belonging to a 3rd party and they continue to receive some benefit from it, HM Revenue and Customs may levy a charge called Pre-owned Asset Tax (POAT). This is aimed at preventing inheritance tax (IHT) avoidance.
A common example of where this could apply is where you sell your home and give part or all of the net sale proceeds to a family member to build the annex for you to live in. The annex would be an asset in that family member’s name but you would be retaining a benefit by living in the annex rent free.
How much is the charge?
The POAT calculation is complicated and is based upon the benefit or potential benefit enjoyed by you as a result of staying in the property. In simple terms, you are treated as having received the market rent for the property and the equivalent of income tax would be charged annually.
How do I pay the annual charge?
This would be done on a self-assessment tax return. This is an annual charge and will need to be paid each year much like income tax. We have in-house accountants who would be able to assist with preparing this return.
What can be done to avoid the annual charge?
You can make an election for POAT not to apply and instead continue to treat the cash as forming part of your estate for IHT. This means that the value of the cash given to the family member would be included within your estate on death and this would be accumulated with the remainder of your assets.
This POAT charge does not apply if the property remains within your estate for IHT as this would instead classed as a gift with reservation of benefit.
If I want to make the election, when should the election be made?
You must make the election by 31 January following the end of the tax year in which you first become liable for POAT.
How do I make the election?
You make the election by completing an IHT500 form and submitting this to HMRC. We can assist in completing and submitting this form on your behalf
Should you think that this charge may be relevant to you, then please get in contact with us on 01279 755 777 or fill in our online enquiry form to seek further advice and assistance with any forms which might be required.