Many individuals who are concerned about inheritance tax (IHT) being payable on their death estates will undertake IHT planning in their lifetimes.
Income tax – on IHT planning!
However, in some cases this will result in an income tax charge instead. Even if no IHT planning is undertaken, this income tax charge can still bite in certain circumstances.
The income tax charge is ‘pre-owned assets tax’ (POAT). These anti-avoidance provisions (in FA 2004, Sch 15) broadly charge income tax on benefits received by former owners of three types of assets (i.e., land (including properties), chattels and intangibles in a settlement) who continue to receive a benefit following disposal, where certain conditions are satisfied.
Let-outs from POAT
However, there are various possible escapes from POAT. Here is a selection of potential exclusions and exemptions from POAT, mainly in the context of land (which is probably the most affected asset).
- Arm’s length disposals: A disposal of the whole interest in a property is excluded if made at arm’s length with an unconnected person, or on arm’s length terms with a connected person.
- Transfers to (or for) spouses (or civil partners): Such transfers are also generally excluded from POAT.
- Certain IHT exceptions apply: Disposals for the maintenance of family etc., for IHT purposes or outright gifts subject to the annual or small gifts exemptions from IHT are excluded from POAT.
- Still in the 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.
- Gifts with reservation: There is an exemption from POAT if the property is subject to the gifts with reservation (GWR) anti-avoidance rules for IHT purposes. In addition, some transactions are excluded from both a GWR and POAT charge, if certain conditions are satisfied. This covers some IHT-exempt gifts and acceptable sharing and occupation arrangements for GWR purposes.
- Foreign exemptions: POAT does not apply to a person for any tax year during which they are 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.
- £5,000 threshold: There is an exemption from POAT where the ‘appropriate rental value’ does not exceed £5,000 for the relevant tax year.
- Deeds of variation, etc.: A change in the distribution of a deceased’s estate (e.g., by variation) 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.
Among the other potential POAT let-outs, there is an exclusion for outright gifts of money, if it was made at least seven years before the relevant person first occupied the land (or chattels). Even if none of the statutory exclusions or exemptions apply, it may be possible to make an election 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.
The above article was first published by Tax Insider (March 2021) (www.taxinsider.co.uk).