The 2004 Finance Act introduced a new tax charge which is known as the ‘pre-owned assets’ charge, commonly referred to as ‘POT’. The purpose of introducing this charge is to counter a number of inheritance tax planning ideas which enable owners to give away assets, such as their homes, whilst continuing to enjoy their use until death, tax free. The Government had previously introduced the ‘gift with reservation of benefit’ rules in order to stop this occurring, however their inadequacy became apparent as an increasing number of tax planning ideas were implemented to circumvent this legislation. POT therefore serves to bolster these existing inheritance tax provisions by imposing an income tax charge in specific situations.
Who will the charge apply to?
The application of POT will depend on your residence and domicile position. Broadly speaking, this is as follows:
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Due to the complexity of the case law surrounding domicile, if you are a non UK domiciled individual, you should check with your usual Private Client Services adviser as to how POT affects you specifically.
When will it apply?
POT comes into effect on 6 April 2005 and has a number of controversial features. Generally, it will charge individuals to income tax on an annual basis in respect of benefits which they enjoy (or potentially could enjoy) from certain kinds of property, which they have owned at some time after 17 March 1986.
The amount of tax payable will be based, in most cases, on the value of the asset at 6 April 2005 to which a prescribed rate of interest, 5% for 2005/2006, will be applied. It is clear therefore not only that the amounts of tax at stake could be significant but also that valuations of particular assets could be required within a relatively short time scale.
It is vital that the effect of these rules are considered not only in the context of transactions which have already been undertaken by you since 17 March 1986, but also to those which you may be intending to undertake in the future.
Which assets does the charge apply to? POT will only apply to the following assets:
(a) Land and houses;
(b) Chattels (such as valuable personal property); and
(c) Intangible property (such as cash or shares, contained within a settlor interested settlement).
Fortunately, there are various exclusions and exemptions which, if applicable, prevent POT from applying. For example, the disposal of a property to an unconnected third party or a transfer of a property to your spouse should be excluded from POT.
Any asset which is included in your estate for UK IHT purposes should also be exempt from the charge. If this exemption did not exist, there could be a potential double tax charge, i.e. inheritance tax and income tax, on the same asset.
In addition, even if the POT regime is applicable, an election may be made to opt out of the charge, avoiding the payment of income tax, and into the gift with reservation of benefit rules. However, it should be noted that the use of an election may not automatically restore the status quo for planning that has already been implemented.
Could it apply to you?
The rules are so widely drafted that they catch a number of entirely innocent and unexpected situations. Therefore, it is imperative for you to consider all relevant gifts or transactions which have been made or undertaken since 17 March 1986 and to speak to your usual Private Client Services contact to establish whether there is any exposure to POT. Situations caught under the POT rules are as follows:
Have you given away a piece of land or property which you continue to use, perhaps you continue to live in the property or benefit from the land in some way? • Have you given away a valuable personal item, such as a piece of furniture or a specific work of art, which you continue to have in your own home?
Have you made a cash gift within the last seven years to anyone who has used either that cash or proceeds from an asset bought with that cash to purchase a property/asset from which you can benefit?
Have you set up a trust from which you could potentially benefit either now or in the future? The pre owned assets charge could apply to you if you are included within the class of beneficiaries and are not a life tenant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.