Income tax and pre-owned assets - frequently asked questions
Contents
- How is the benefit calculated?
- What is the date of valuation?
- What is the de minimis limit?
- Are there alternatives to paying the income tax charge?
- How do I go about unravelling the scheme or electing to have it treated as a GWR?
- When should I make the election?
- What happens if the taxpayer dies part way through the tax year, before they have made the election?
- What happens if the taxpayer dies before the start of the tax year when the charge to income tax on pre-owned assets comes into force?
- What happens if the taxpayer starts paying a market rent?
- The firm that sold me the scheme are charging me for unravelling it. Can this expense be offset against the tax liability in any way?
- Where can I obtain more information about the income tax charge on pre-owned assets?
- Where can I find the law about income tax on pre-owned
assets?
Q. How is the benefit calculated?
A. For land the benefit is calculated by reference to the rental value of the land. This is the rent that would have been payable if it had been let to the taxpayer at an annual open market rent. That annual value is calculated assuming the tenant undertook to pay all taxes, rates and charges usually paid by a tenant and the landlord undertook to bear the cost of repairs and insurance and any other expenses necessary for maintain the property in a state to command that rent.
For chattels and intangible property the charge is a percentage of the open market value of the chattel. The percentage is the official rate of interest, which was 5% for 2005/06 and 2006/07. It increased to 6.25% on 6 April 2007.’
The value on which the benefit is calculated may be affected by contributions
and disposals that the taxpayer has made on or after 18th March 1986. Contributions
and disposals made before this date are ignored for POAT purposes .
Q. What is the date of valuation?
A. The date of valuation is 6th April in the first year of assessment or the date on which the taxpayer first becomes liable to pay the income tax charge. The income tax charge for land and chattels is based on that value for the first and the following four years of assessment. A new valuation is required after the first five years of assessment. For example, a taxpayer liable to the income tax charge for all of 2005-06 would value the property at 6th April 2005, 6th April 2010 and every five years after that for as long as they continue to benefit from the pre-owned asset. A taxpayer who becomes liable to the charge on 6th October 2007, would value the property at 6th October 2007, 6th April 2011 and every five years after that. This 5 year valuation rule only applies to land and chattels, and all other property (intangibles) will require a revaluation each year. If you move during the course of the five years then the substituted property is valued for the purposes of calculating the charge.
Q. What is the de minimis limit?
A. If after you have calculated the benefit it comes to £5,000 or less for the year of assessment, you do not need to declare the benefit as part of your income for that year. If it is more than £5,000 you must declare it as part of your income for that year. Note that if the benefit is more than £5000 the entire amount is taxable and there is no exemption for the first £5000. If both you and your spouse or civil partner are liable for the charge then you each have an exemption of £5000 but you cannot transfer any unused exemption to the other spouse or civil partner.
Q. Are there alternatives to paying the income tax charge?
A. You have a number of options. Depending on what you have done to set up the arrangements that lead to you being liable to the income tax charge, you may not be able to negate completely what was done. It may be possible to take some steps which mitigate the effect of income tax on the scheme but you may want to contact the people who were involved in setting up the scheme or seek other advice before taking this further.
If you elect to treat the arrangement as a gift with reservation, all of the steps you have taken still operate - so if there is a trust in place, the trust still exists and when you die the property will pass under the terms of the trust. But for inheritance tax purposes the property will be treated as forming part of your estate and inheritance tax will be payable if the total chargeable value of your estate including previous lifetime gifts made in the last 7 years is more than the nil rate band and the reservation of benefit has not ended within the 7 years prior to your death. Remember that any property on which you elect will also remain part of the donee’s estate for inheritance tax purposes.
Other options open to you are to pay a market rent for the occupation or
use of the property or to pay the income tax charge. Which option will be
better for you will depend on your personal circumstances.
Q. How do I go about unravelling the scheme or electing to have it treated as a GWR?
A. How you "unravel" a scheme may have unforeseen effects and you are advised to contact the advisers who helped you set up the scheme originally. If they are not available you may want to consider taking advice from another legal or financial adviser.
If you want to elect to treat the property as a gift with reservation for
inheritance tax, complete form IHT 500 (PDF 567K)
. Guidance about how to fill out the form is given in IHT
501 (PDF 128K).
Q. When should I make the election?
A. You have until 31st January in the year following the first year of assessment. So if you become liable to the income tax charge for 2005-06, you will have until 31st January 2007 to make the election. If you do not make the election by then you are liable to pay income tax on the benefit from that year of assessment until you cease to benefit from the pre-owned asset or it otherwise forms part of your estate for IHT purposes (e.g the donee gives it back to you),
Q. What happens if the taxpayer dies part way through the tax year, before they have made the election?
A. The taxpayer will be liable for income tax on the benefit they derive from the pre-owned asset from the 6 April in the first year of assessment up to their date of death. It is not possible for personal representatives to make an election after the date of death and the estate will be liable to pay the income tax due up to that date (provided it is not below the de minimis limit). But the charge to income tax on the pre-owned asset ceases on the death of the taxpayer.
Q. What happens if the taxpayer dies before the start of the tax year when the charge to income tax on pre-owned assets comes into force?
A. As their death means they have ceased to benefit from the pre-owned asset they will not be liable to the income tax charge.
Q. What happens if the taxpayer starts paying a market rent?
A. If the taxpayer is liable to the income tax charge for the year 2005-06 but from 6th April 2005 pays the legal owners of the land a full open market rent, the taxpayer ceases to be liable to the income tax charge. However, if the taxpayer later stops paying the rent or the rent paid falls below an open market rental or if the rent is paid for only part of the year, then the taxpayer is liable to income tax on the benefit he derives that is above the rental actually paid. Please note though that paying a market rent for the use of chattels will not mean that the POAT charge ceases to apply since the basis on which the benefit is computed is different than for land.
For example, a taxpayer agrees to pay an open market rental from 6th October
2005 for a house with a monthly rental value of £1,000. The taxpayer
would be liable for income tax on the benefit derived from not paying the
rental for the first six months of the year of assessment £6,000 (6
months at £1,000). But he would not be liable for income tax for the
remainder of that year and the following years in which he pays a market rental.
Q. The firm that sold me the scheme are charging me for unravelling it. Can this expense be offset against the tax liability in any way?
A. No.
Q. Where can I obtain more information about the income tax charge on pre-owned assets?
A. The guidance provides more details about the charge, exclusions from the charge, how to calculate the value of the benefit and elections for inheritance tax.
If you cannot find an answer you may call the Probate and Inheritance Tax
Helpline on 0845 30 20 900. Please remember that we can only supply information.
We cannot advise you what to do and given the complexity of schemes you may
want to seek independent legal or financial advice.
Q. Where can I find the law about income tax on pre-owned assets?
A. The income tax charge on benefits received by the former owner of property is in Schedule 15 to the Finance Act 2004
The Charge to Income Tax by Reference to Enjoyment of Property Previously
Owned Regulations 2005 (The
Regulations) sets out the basis of valuation, makes further exclusions
from the charge and allows relief for double charge to tax in certain circumstances:
