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POAT: Out Of The Frying Pan Into The Fire? Part 1


Mark McLaughlin provides an overview of the pre-owned assets tax charge as it applies to land and properties.

Individuals (and advisers) will sometimes need to consider whether ‘pre-owned assets tax’ (POAT) applies, such as (but not necessarily) if inheritance tax (IHT) planning is undertaken.

The POAT rules broadly charge income tax on benefits received by former owners of three types of asset (i.e. land (including properties), chattels and/or intangibles in a settlement) where certain conditions are satisfied. This article focuses on the POAT rules for land, and properties in particular.

It might seem strange that POAT was introduced to discourage IHT planning arrangements (hence the title of this article). In fact, the scope of POAT (in FA 2004, Sch 15, and Treasury regulations) is wide, and can potentially affect ‘innocent’ transactions. The POAT charge operates from the tax year 2005/06, but applies to property owned from 18 March 1986. Part one of this article concerns the POAT charge on land and looks at some circumstances where it could apply. Part two looks at some important exclusions and exemptions from the POAT charge, and also an election out of POAT (and into IHT).

The POAT rules are complicated, and this article does not examine them in any depth. HM Revenue and Customs (HMRC) guidance on the subject can be found in its Inheritance Tax manual (at IHTM44000-44116).

What is ‘caught’?
In very broad terms, if an individual has either disposed of land (or other property, if used by another person to acquire the land) (i.e. the ‘disposal condition’), or has contributed towards the acquisition of the land (or other property, as above) (i.e. the ‘contribution condition’) but occupies the relevant land, they are potentially liable to POAT (Sch 15, para 3).

HMRC interprets ‘occupies’ fairly widely. For example, HMRC states (at IHTM44003): ‘It 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 may be evidence of occupation.

If POAT applies, the amount chargeable to income tax in relation to the relevant land is broadly the ‘appropriate rental value’ (as defined), less any payments that the individual is legally obliged to make to the owner in the period for occupying the land (see Sch 15, para 4).

The POAT calculation is beyond the scope of this article. However, it should be noted that there is a possible ‘de minimis’ let-out for individuals who would otherwise be subject to a POAT charge, where the appropriate rental value (plus any POAT amounts for chattels and intangibles) does not exceed £5,000 (Sch 15, para 13). If this £5,000 threshold is exceeded (i.e. even by £1), the exemption is lost. However, if (say) a married couple (or civil partners) are both liable to a POAT charge on a property, the £5,000 exemption should be available to each of them (i.e. £10,000 in total).

Disposal condition

As mentioned, POAT has effectively blocked a number of IHT avoidance schemes, which were relatively complex. However, the ‘disposal condition’ is very wide and POAT can also apply in straightforward and ‘innocent’ circumstances.

Example 1: Gift of cash
John made a cash gift of £450,000 to his adult son Ken on 30 September 2012. Ken used it to buy a residential property. John moved into the property on 10 April 2017 and occupies it rent-free; he is subject to POAT from that date.

Contribution condition
The ‘contribution condition’ is also very wide, and can apply to indirect contributions to the land or property being occupied by the taxpayer.

Example 2: Sale of buy-to-let property
Linda gave her daughter Mary £300,000 on 24 December 2013, which Mary used to purchase a buy-to-let property. That property was subsequently sold for £600,000. Mary used the proceeds to buy another property on 31 May 2017, and allows Linda to occupy it rent-free.

HMRC is likely to take the view Linda is liable to POAT on one-half of the appropriate rental value of the property she occupies.

Paying rent
As indicated above, any payments by the taxpayer to the owner under a legal obligation to occupy (e.g. a lease of the property) are taken into account in the calculation of the POAT charge.

It should be noted that if the appropriate rental value of a property is (say) £11,000 and the occupant pays rent under a tenancy agreement of £6,000, the above ‘de minimis’ exemption of £5,000 does not apply to the balance, as the appropriate rental value exceeds £5,000.

Practical Tip:
There is an exclusion from POAT for outright gifts of money if it was made at least seven years before the relevant person first occupied the land (Sch 15, para 10(2)(c)). Thus, in Example 1, if John’s cash gift to Ken had been made before 10 April 2010, he would have been outside a POAT charge.


This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.