The ‘Pre-Owned Assets Tax’ (POAT) is an income tax charge levied on the ‘benefit’ earned on any property that has been given away (or sold for less than its full value at any time since 18 March 1986) but of which the owner still enjoys the use.
The charge also applies if the owner gives someone the funds to purchase a property, or an interest in it, or owned another property which was sold and the proceeds gifted to buy the property. The charge will not apply if there is a gap of more than seven years between the gift and the purchase of the property.
The benefit is calculated by reference to the rental value of the property, i.e. the rent that would have been payable if it had been let to the taxpayer at an annual open market rent.
There is a ‘de minimis’ amount of £5,000 per tax year per spouse/civil partner, but it is not possible to transfer any unused exemption from one partner to the other.
Either of the Gift With Reservation of Benefit (GWRB) or the POAT rules could apply in the situation where a donor has gifted property but remains in residence paying no or minimal rent.
If POAT applies and it is not viable to meet the ongoing income tax bill but there is less concern about the eventual IHT bill, an election can be made for the GWRB rules to apply instead of the POAT.
In January 2008 David gives his son, Jim, £250,000 which he spends on acquiring Greenacres. David moves into Greenacres in April 2015 and he will be subject to the POAT charge as from that date.
If the market rent of the property is £4,995 per annum and no rent is paid, there will be no POAT charge as the market rent is less than the ‘de minimis’ limit.
If the market rent is £10,000 per annum and David is contracted to pay a rent of £5,000, the full £10,000 will be subject to the POAT charge but with a reduction for the rent paid.
If David had moved into a house that Jim had bought with his own money and then David gave him funds which were used for improvements, then there will be no POAT charge. The reason is that it is not David’s money that has been used to acquire the property.
This tip was first printed in Tax Insider in November 2016.