In the second part of his article, Mark McLaughlin highlights some possible exceptions to the pre-owned assets income tax charge, as it applies to land and property.
The pre-owned assets tax (POAT) is an income tax charge that can be an unexpected and unpleasant surprise for some individuals. Fortunately, the scope of POAT is restricted by several excluded transactions and exemptions from the charge.
This article highlights the main exclusions and exemptions from POAT, particularly in relation to land and property. The lists are not exhaustive, but feature some important exceptions (references in this article are to FA 2004, Sch 15, unless otherwise stated).
Exclusions from POAT
If a transaction is excluded, no POAT charge can arise. Whilst this article focuses on excluded transactions for land and property, note that the specific exclusions (in Sch 15, para 11) also apply to chattels, but not intangible property. The exclusions include:
1. Disposals of property at full value – A disposal of the whole interest in a property is an excluded transaction if made at arm’s length with an unconnected person, or on arm’s length terms with a connected person (para 10(1)(a)).
2. Transfer to (or for) spouse (or civil partner) - The transfer of property to a spouse (or where ordered by a court order, a former spouse) is also excluded from POAT. The same applies, broadly, to gifts which become settled property in which the spouse (or for transfers ordered by a court order, a former spouse) is beneficially entitled to an interest in possession that ends on death (para 10(1)(b), (c), (3)).
3. Certain inheritance tax exceptions apply - Disposals for the maintenance of family, etc. for inheritance tax (IHT) purposes (within IHTA 1984, s 11), or gifts subject to the annual or small gifts exemptions from IHT (IHTA 1984, ss 19, 20), are also excluded from POAT (para 10(1)(d), (e)).
In addition to the above exclusions for disposals, there are similar exclusions from POAT for the purposes of the ‘contribution condition’. There is also an exclusion for outright cash gifts made at least seven years before the relevant person first occupied the property (para 10(2)).
Exemptions etc. from POAT
Specific exemptions from POAT include:
1. Still in IHT estate – The property (or property derived from it) is normally (but not always) exempt from POAT if it is included in the individual’s estate for IHT purposes (para 11(1)-(2));
2. Gifts with reservation – There is an exemption if the property is subject to the ‘gifts with reservation’ (GWR) IHT anti-avoidance rules. In addition, some transactions are excluded from both a GWR and POAT charge, if certain conditions are satisfied (para 11(3)-(10)). This covers certain exempt gifts for IHT purposes (in FA 1986, s 102(5)(d)-(i)). It also includes certain acceptable sharing and occupation arrangements for GWR purposes, e.g. where a parent disposes of a share of his or her residential property to an adult child, and they both occupy the property, sharing the outgoings (i.e. commensurate with their respective enjoyment of the property), such that the GWR exception in IHTA 1984, s 102B(4) applies (see para 11(5)).
3. Foreign exemptions – POAT does not apply to a person for any tax year during which he or she is not resident in the UK. For UK resident but non-UK domiciled persons (as defined for IHT purposes), POAT only applies in relation to UK property (or chattels or intangibles); settled excluded property (within IHTA 1984, s 48(3)(a)) is not taken into account (see para 12).
4. £5,000 threshold – There is an exemption from POAT where the ‘appropriate rental value’ of the property (plus any POAT amounts for chattels and intangibles) does not exceed £5,000 for the relevant tax year (para 13).
5. Deeds of variation, etc. – A change in the distribution of a deceased’s estate (e.g. by variation or disclaimer) is disregarded for POAT purposes if it is not treated (under IHTA 1984, s 17) as a transfer of value by the chargeable person for IHT purposes (para 16).
6. Guarantees – If a person acts as guarantor for a loan to another person, the mere giving of the guarantee is not regarded as consideration for the other person’s acquisition of the property (para 17).
7. Partial equity release - There is a POAT exemption for the part disposal of an interest in a property: (i) before 7 March 2005; or (ii) after that date if either the disposal was at arm's length to an unconnected person, or the disposal was on arm’s length terms for consideration not in money or readily convertible assets (SI 2005/724, reg 5).
Even if none of the statutory exclusions or exemptions apply, in some cases it may be possible to make an election (on form IHT500) within the statutory time limit not to be subject to a POAT charge in respect of the relevant property, but to be treated as being within the IHT provisions instead (paras 21-23). Consideration would need to be given to which regime is more tax-efficient in the particular circumstances.
This article was first printed in Property Tax Insider in October 2017.