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Don’t miss the Poat

The onus is on taxpayers to ensure they comply with the new pre-owned assets tax regulations, says Canada Life technical support manager Jeremy Pearson.

“Anyone who finds in due course that they are liableshould notify their chargeability to tax in the normal way.” Not a surprising statement by the Inland Revenue in this era of self-assessment, perhaps, but when taken in the context of the pre-owned assets tax (Poat), this simple statement fronts an area of huge complexity.

It seems that the Revenue is expecting people to analyse a complex and contentious schedule of legislation, apply it to all estate planning done since 1986, value their relevant property and ascertain the market rent, value their relevant trust assets and apply a rate of 5 per cent to them.

Then, if the answer is over 5,000, they must enter the details on their tax return – which from 2005/06 will make provision for amounts chargeable – and pay tax accordingly. This tax liability starts on April 6, 2005, less than two weeks away.

Many people have been delaying taking action to avoid the pre-owned assets tax as they were awaiting guidance from the Revenue. We were told that final guidance would be published “early in the new year”. However, it was not until March 7 that a release was made in which Paymaster General Dawn Primarolo promised that regulations would follow shortly. Given the Government’s inability to produce regulations until less than a month before the start of a tax which was first mooted in December 2003, perhaps a deferral of the start date might be in order?

In any event, the conclusion must be that a knowledgeable financial adviser is an essential requirement for anyone affected by the pre-owned assets tax. But how many clients have been with the same adviser since 1986? The pre-owned assets tax is a retroactive tax (not retrospective, as the Government is at pains to point out) and any gifts made after March 17, 1986 could be liable.

These gifts fall into three categories of assets – land, chattels and intangible property. I am not going to review the whole of the legislation as this has been done before. At this late stage, it is more appropriate to review what should be done before April 6.

The pre-owned assets tax is an income tax charge which arises on benefits received by the former owner of property. It arises where an individual has given away assets to reduce their inheritance tax liability but still benefits in some way. The benefit could be living rent-free in a property, having a work of art in their home or being able to receive withdrawals from an investment bond under trust.

There is existing legislation to counter this situation in the gift with reservation provisions but modern-day schemes have managed to circumvent this clause. So the first step is to ascertain if the client has any schemes which could cause a liability. Insurance companies have given guidance on the pre-owned assets tax position of their schemes and notified IFAs accordingly. The two schemes which appear to be caught are the double trust scheme, involving the family home and an IOU, and the spouse alienation trust.

This latter scheme involves writing an investment bond under trust with the initial beneficiary as the spouse, then changing the beneficiary at a later date, typically to the children. The spouse exemption applies to the initial settlement into trust and the later change of beneficiary would be a potentially-exempt transfer by the spouse. If no action is taken before April 6, the original settlor is deemed to benefit to the extent of 5 per cent of the capital value of the policy on that date. No tax is due if the total benefit from all schemes is not more than 5,000. Otherwise, the benefit must be declared and tax paid on that amount.

If the policy is worth 110,000 on April 6, the benefit is calculated as 5,500. If the client is a higher-rate taxpayer, 2,200 tax is due. This will recur annually, based on the policy value, as long as the arrangement still benefits the settlor.

The prospect of paying additional income tax will be unacceptable to most clients, so what are the alternatives? It is a choice between giving up the benefits from the trust fund and electing that the trust be now subject to inheritance tax.

To opt back into the inheritance tax regime, the taxpayer has to complete the appropriate form. We were told in August by the Revenue that it was “preparing the form that taxpayers will require” but seven months later there is still no sign of it. This may not be too much of a problem, however, as the taxpayer has until January 31, 2007 to submit the form.

By making this election, the intended inheritance tax savings will not have been made and, if the arrangement was put in place more than seven years ago, meaning the potentially-exempt transfer period has passed, it will make it doubly difficult to give up on the scheme.

Alternatively, the settlor could give up their benefits under the trust entirely or in part. For example, they could reduce the benefits to below 5,000 although this would have to be regularly checked in future years in case investment growth took them above the limit again.

The trade-off for the settlor is that although they lose access to the trust fund, at least the inheritance tax savings are preserved.

Finally, it may be possible to unwind the arrangement but, given the wide reach of most modern trusts, this may be impossible.

One thing this whole pre-owned assets tax farrago shows us is the Government’s new attitude to tax avoidance. It used to be that only evasion was unacceptable but, as Primarolo made clear last year, there have been “repeated attempts by this Government…to stop inheritance tax avoidance schemes”.

This just goes to underline the significance of inheritance tax revenues and the importance the Government places on them.


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Journalist Alexis Xydias discusses the opportunities – and potential pitfalls – of investing in China with Artemis fund manager Peter Saacke. With Peter holding significant positions in China in the Artemis funds he manages, journalist Alexis Xydias quizzes Peter on the risks of investing in Chinese stocks – including over-valuations, margin trading and financial reporting issues. Click here for video


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