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Pre-Owned Assets Tax

THE INCOME TAX CHARGE
From April 2005 a new income tax charge was introduced to be levied on individuals who gift assets whilst retaining a benefit from them. In the typical case of property, the benefit arises by the donor's continued residence or enjoyment of the said property and in some cases the charge will also be levied on a donor who benefits from the use of assets which were purchased with monies he or she had previously gifted!

The 'pre-owned assets' will be taxed on an 'annual value'  basis and the charge will levied in the form of an income tax charge against the donor. Where property is concerned, the 'annual value' will be the open market rental value. For all other assets the charge will be levied at 5% of the capital value of the asset. The fixed percentage was originally based on interest rates;' thus, the percentage may or may not rise in the future.

Valuation
The appropriate values to be used in the calculations are the values extant at the beginning of the first tax year to which the charge applies or if later, the date at which the assets first falls within the Pre-Owned assets tax provisions. In the majority of cases the relevant date for valuation will be 6th April 2005.

The value derived can be used for a period of 5 tax years after which time assets will need to be re-valued in accordance with the above rules. Any payments made under a legal obligation - i.e. a tenancy or a lease - by the donor can be deducted from the annual value.

PRE-OWNED ASSETS EXEMPTIONS
The Pre-Owned Assets Tax Charge will not apply in the following circumstances:

  1. The asset was gifted before 18th March 1986
  2. Asset was transferred to a donor's spouse or former spouse in accordance with the terms of a court order (divorce for example)
  3. The asset was transferred to a trust for the benefit of the donor's spouse or former spouse under the terms of a court order. If the spouse or former spouses' interest in possession comes to an end by means other than death, the exemption will cease to apply.
  4. The asset was transferred for the purposes of maintaining the family as per the 'maintenance of family' inheritance tax exemption (see Inheritance Tax Exemptions).
  5. The asset was an outright gift to an individual which was covered by the annual exemption or small gifts exemption.
  6. The asset was acquired with funds from an earlier gift of the donor which itself would have fallen within any of the exemptions listed above.
  7. The asset already forms part of the donor's estate due to the Gifts with Reservation rules thus the POA tax charge will not apply.

    DEFINITIONS
    Connected persons include:

    • Husband, wife, civil partner
    • Mother, father, grandparents
    • Son, daughter, grandchildren
    • In-laws (mother, father, brother, sister-in law)
    • Business partners
    • Companies under control one party to transaction or any of his/her relatives as above
    • Trustees of a trust where other party to transaction or any his/her relatives as above is a beneficiary

    For the purpose of the POA tax charge, connected persons will ALSO include:

    • Aunts, uncles
    • Nephews, nieces
    • Trustees of trust where any of the relatives are a beneficiary
  8. The ENTIRE asset was sold on commercial arms-length terms. Thus, it is permissible to make a sale to a connected person provided it is a commercial sale at full value.
  9. PART of the asset was sold on normal commercial arms length terms to an UN-CONNECTED person
  10. PART of an asset sold to a connected party on normal commercial arms length terms will be exempted if was sold either;
    1. Before 7th March 2005
    2. For consideration not in the form of money or other readily convertible assets (assets which can be converted to money)
  11. The asset had been inherited by the donor but his or her ownership had ended due to the making of a Deed of Variation
  12. The donor's continued enjoyment of the property has arisen due to unforeseen circumstances which has left them unable to care for themselves.
  13. The donor's enjoyment of the asset is minor and incidental.

    (For further explanation of provisions 12 & 13 see Gifts with Reservation rules).

  14. The POA charge will not be levied if the donor's total annual taxable benefit BEFORE deduction of contributions paid by donor do not exceed the sum of £5,000. If the taxable benefit is a penny over the stated sum, the exemption will not apply.
  15. The asset in question was acquired from a previous gift of money made seven years or more before the donor first enjoyed any benefit from the asset.
  16. The original gift of the asset was exempt from inheritance tax originally as was a gift to charity or charitable organisation.
  17. The donor has retained a suitable interest in the gifted asset.

    EXAMPLE:
    Ben owned his property solely and decides to give his daughter a joint share in the property. His daughter also lives with him. This scenario will not incur the POA tax charge.

    The exemption does not apply however where a parent gives the child money or another asset with which the child uses to fund a joint purchase.

  18. The donor is non UK resident.

The sheer number of the exemptions clearly illustrates that this is an appalling piece of legislation.

THE POA TAX & PLANNING WITH THE FAMILY HOME
In previous sections planning techniques have been outlined with regards to the family home. Here, the impact of the POA tax will be assessed on those techniques.

Move Out & Give Away
As long as the donor never moves back into the property or does so due to unforeseen circumstances which has left the donor unable to care for him/herself, no POA tax charge should arise.
Additionally, the donor must never benefit from any other asset purchased with the proceeds of a subsequent sale of the original property.

Sell & Give Away Proceeds; Re-Mortgage & Give Away Proceeds; Re-Mortgage & Buy An Annuity
With all three techniques no POA tax will arise provided the donor does not receive any benefit or use of any asset purchased with the proceeds within a 7 year period after making their cash gifts.

Sell/Re-Motgage & Invest Proceeds; Sell at Market Value; Widow's Loan Scheme
No POA tax charge will arise under the above three techniques.

Leave Share to Children; Children Put Share into Trust; Leave Share to Discretionary Trust
If the surviving spouse had originally given a share in the property to te deceased, or had done so before they were married/entered civil partnership, the POA tax may arise.
Additionally, with the 'Children Put Share into Trust' technique, the beneficiaries under the deceased's will must not have any any use or enjoyment of the property during the life interest of the surviving spouse/partner, otherwise the POA tax charge would arise.
NB: Minor use of the property, such as limited social visits is permitted and no POA tax charge would accrue in such circumstances.

Full Consideration
This technique should not attract the POA tax charge but it is ABSOLUTELY IMPERATIVE that the rental payments are made under a formal lease and reviewed every five years in line with the POA assets revaluation rules.

Co-Ownership
This method will not be caught by the POA tax rules, specifically confirmed by HMRC.

Shearing
HMRC after much hesitation confirmed that this method does work for IHT purposes but as a consequence, it will be caught by the POA tax charge.

Three Way Split
If the survivor had funded the purchase of the property prior to marriage there is a risk of the POA tax charge applying. If this is not the case, then the method will avoid the POA charge.