Pre-Owned Assets Tax And Other Property Tax Issues - May 2009
Isis Financial Planners' Maggie Fleming answers reader's questions in Saturday's Daily Telegraph newspaper for the Property Clinic section.
There is a wealth of information on all aspects of property and tax from Capital Gains Tax and Inheritance Tax to other technical and challenging issues of this complex subject. This page shows the articles for May 2009. To browse the articles from a previous year, please visit the main Property and Tax page of this website.
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Pre-Owned Assets Tax - 18 May 2009
Not another tax - what's this one?
Maggie Fleming writes:
The pre-owned assets tax, POAT, was introduced in 2005 but is barely known to the general public. It plugs what the Government saw as a loophole, by which people circumvented the IHT "reservation of benefit" rules to give away their homes while continuing to live in them rent-free.
POAT only applies where IHT doesn't so if your property is still in your estate you do not have a problem; however, if you used one of the convoluted IHT avoidance schemes, involving lease carve-outs or double trusts, you are most likely liable to a POAT charge.
So I'm all right...
Possibly not. POAT goes further, by catching transactions that had no IHT implications at the time. If, in 2003, you gave your children money and they used it to buy you a house to live in, there were no tax consequences at that time. But POAT is retroactive so this could now result in a charge.
How does it work?
Unlike IHT, POAT is not a tax on the capital value of the property. Instead, you pay an annual income tax charge based on the rental value, assuming a standard residential tenancy where the lessee pays all rates and charges and the landlord handles repairs and insurance. If the open market rent for your property was £12,000 a year, you would declare this on your tax return and pay additional tax of £2,400 if you are a basic rate taxpayer or £4,800 if you are a higher rate taxpayer.
There is no charge if the deemed rental value is less than £5,000 and this de minimis amount applies per person; a couple who had previously owned the property jointly are exempt from POAT if the open market rent is no more than £10,000 a year.
Under self-assessment, it is the taxpayer who must decide whether or not he is liable to the charge and arrange for the relevant valuation (and revaluation every five years). Of course, HM Revenue & Customs can challenge a figure they feel is too low.
So what should I do?
HMRC is determined to crack down on non-payment of POAT, but in many cases liability will only come to light after the taxpayer has died. If you think that you may be affected, you should review any transactions involving your family home with your solicitor and/or accountant.
There are ways to get out of the scope of POAT. You can pay a market rent for use of the property or, depending on the circumstances, it may be possible to elect back into the very IHT regime you went to so much trouble and expense to avoid.
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