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On your marks for Poat

I’m sure all you advisers who take an interest in technical matters will be only too aware that we are just a few days away from a new tax.

From April 6 an annual income tax charge will be levied on the benefit people enjoy when they have arranged free continuing use of major capital assets they once owned.

The aim of the Pre-owned asset tax (Poat) is to crack down on certain inheritance tax (IHT) planning arrangements which enable a person to give away a major capital asset and still enjoy a future benefit from it, without infringing the gift with reservation rules.

There was concern last spring about the impact of Poat on recognised IHT-planning techniques, such as discounted gift schemes and gift and loan schemes which utilise insurance products as their core underlying investment. But, in a letter dated September 17 to the ABI, the Inland Revenue confirmed it was not its intention to tax discounted gift schemes, however structured. Nor was it to catch gift and loan schemes where the settlor’s only interest under the trust is as a creditor.

However, despite this good news, some fears about the impact of the tax on life assurance arrangements remained and with the publication by the Revenue of the Pre-owned Assets Technical Guidelines on March 17, it seems these fears have been confirmed.

It appears shareholder or partnership protection arrangements, where shareholders or partners effect reciprocal cover subject to a trust to enable fellow shareholders or partners to purchase their shares or partnership interests on death, will be caught by the new tax.

The problem with this type of arrangement from the Revenue’s perspective seems to be that the trusts generally used with this type of policy provide for the benefits to revert back to the settlor automatically on the occurrence of certain events, such as the settlor leaving the business, retiring from it or the business itself ceasing to exist. Thus, a settlement exists and as it is a settlement from which the settlor can benefit, it falls within the Poat rules.

But how will the tax apply? The open market value of the policy needs to be determined and once this is done, an interest rate of 5 per cent is applied.

If the resultant figure is 5,000 or less, it falls within the Poat de-minimis limit and no tax is payable but if the figure is more than 5,000 then tax at the settlor’s marginal rate will be payable on the full sum.

So, no problem if the policy has no surrender value, you would think. However, what if the settlor is in ill health at the valuation date (which will be April 6 each year for existing policies)? In this case, surely the policy will have an open market value but who is going to determine what it is?

Furthermore, how will the taxpayer even be aware there may be a Poat issue? There will be a question on the tax return about Poat but, even so, taxpayers may well fail to realise their policies fall within the scope of the charge.

Finally, there is one other type of policy which seems to be affected by the Poat rules. This is a regular premium policy effected prior to March 18 1986 and written subject to a trust where the settlor is a potential beneficiary (as was typically the case in those far off times).

The Revenue is more than happy to accept that policies of this type are outside the scope of the gift, with reservation of benefit rules for IHT purposes provided they have not been altered so as to increase the benefits from that date but nonetheless Poat will apply.

It is simple enough to avoid this charge by removing the settlor as a potential beneficiary under the trust but the problem for many life offices is actually being able to identify policyholders in this position.

As far as the policyholders themselves are concerned, I do not know about you, but I certainly could not remember the precise terms of a trust I had created possibly over 20 years ago so, again, many may fail to realise they have a problem. It seems there are interesting times ahead.

Taxpayers may well fail to realise their policies fall within the scope of the charge

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