Mark McLaughlin looks at pre-owned assets tax and the ‘occupation’ of land and buildings.
‘Pre-owned assets tax’ (POAT) is an income tax charge (FA 2004, Sch 15), which was originally introduced to block certain inheritance tax (IHT) anti-avoidance arrangements. However, it can have unintended and unfortunate consequences in some cases.
The POAT rules broadly charge income tax on benefits received by former owners of three types of assets (i.e., land and property, chattels, or intangibles in a settlement) where certain conditions are satisfied. This article focuses on land and property.
Land and property
In essence, if an individual has either disposed of land (or other property, if used by another person to acquire the land) (the ‘disposal condition’), or has contributed towards the cost of the land, etc. (the ‘contribution condition’) but occupies the relevant land, they are potentially liable to POAT.
If POAT applies, the income tax charge in relation to the relevant land is broadly based on the ‘appropriate rental value’ (as defined), less any payments the individual is legally obliged to make to the owner in the period for occupying the land.
Is it ‘occupied’?
It might be assumed a straightforward test to ascertain whether the land etc. has been ‘occupied’. However, HMRC interprets occupation more widely than physical presence. This has the potential to catch arrangements assumed to be outside the scope of POAT.
For example, HMRC states (in its Inheritance Tax Manual at IHTM44003) that occupation ‘… does not necessarily mean the place you reside which implies a greater level of permanence so a lower threshold is required to satisfy the occupation condition.’
HMRC considers that storing possessions on its own is not occupation; but it may be evidence of occupation.
Escaping POAT and IHT
Ongoing occupation is sometimes intended. For example, a parent may gift an interest in their home to an adult child, after which they both occupy the property, sharing outgoings commensurate with their respective enjoyment of the property. Such occupation should be exempt from both POAT and IHT, if handled correctly.
Another possible exception is aimed at preventing POAT and IHT charges following unexpected and unfortunate changes in circumstances involving family members. The donor’s occupation of gifted property is disregarded if the following conditions are all satisfied:
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occupation results from an unforeseen change in the donor’s circumstances;
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the donor has become unable to maintain themself through old age, infirmity or otherwise;
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the occupation represents reasonable provision by the donee for the donor’s care and maintenance; and
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the donee is a relative of the donor (or their spouse or civil partner).
These conditions are cumulative, so care will be needed to ensure that the let-outs from POAT and IHT are available.
Alternatively, if occupation would otherwise be chargeable to POAT, there is nevertheless an exclusion where a full market rent is paid, and an exemption where the ‘appropriate rental value’ for the property (plus any POAT amounts for chattels and intangibles) does not exceed £5,000 for the relevant tax year.
Practical tip
HMRC generally accepts that if someone occupies a self-contained part of their former property and has no access to the remainder (occupied by others), the ‘relevant land’ for POAT purposes should be limited to the self-contained part. However, care should be taken with any visits to the remainder of the property; social visits should be no more than the visits which might be expected but for the earlier gift, etc.
