Income tax and pre-owned assets guidance section 2
Contents
2 How to calculate the benefit subject to the charge
Where the provisions of paragraphs 3 (land), 6 (chattels) and/or 8 (intangible property) apply to a person in respect of the whole or part of a year of assessment, an amount equal to the chargeable amount specified by the Schedule is treated as income of theirs chargeable to income tax.
Unless stated otherwise, the approach to valuing property for the purposes of Schedule 15 follows the rule for Inheritance Tax set out in section 160 IHTA 1984. In other words, it is the price that the property might reasonably be expected to fetch if sold in the open market at that time, without any scope for a reduction on the ground that the whole property is to be placed on the market at one and the same time (see paragraph 15 of this Schedule).
The valuation date for property subject to the charge is 6 April in the relevant year of assessment or, if later, the first day of the taxable period.
When valuing relevant land or a chattel it is not necessary to make an annual revaluation of the property. The property should rather be valued on a 5-year cycle. Before the first 5-year anniversary the valuation of the property will be that set at the first valuation date. Thereafter the valuation at the latest 5-year anniversary will apply.
The "relevant land" for the purposes of paragraph 4(5) is the land currently occupied by the chargeable person. Therefore, where a valuation has been carried out in respect of a charge arising under Schedule 15, and within the 5-year cycle the subject property is sold and a smaller less valuable property is purchased for occupation by the chargeable person, then a new valuation will need to be carried out which will be used for the remainder of that 5-year cycle.
The 5-year anniversary is the fifth anniversary of 6 April in the first year of assessment in which the provisions of this Schedule relating to land or chattels apply to the chargeable person. The first valuation date is the date on which the provisions of this Schedule relating to land or chattels first applied to the chargeable person. If there is an interruption in the person’s use or occupation of the property and the year of a 5-year anniversary is not a taxable period, the year in which the provisions of this Schedule are applied again will be treated as the next 5-year anniversary.
Example
A is first chargeable to Schedule 15 on 6th April 2005. A valuation is obtained then. He becomes non-UK resident for three years from 6th April 2006 to 6th April 2009. The charge does not apply during this period. He returns to the UK on 7th April 2009. A new valuation is made then and this is the start of the next five year anniversary.
2.1 Land (Sch 15 paras 4 & 5)
The chargeable amount in relation to the relevant land is the appropriate rental value, less the amount of any payments which the chargeable person is legally obliged to make during the period to the owner of the relevant land in respect of their occupation.
The appropriate rental value is
R x |
DV |
V |
R is the rental value of the relevant land for the taxable period.
DV is
- Where the chargeable person owned an interest in the relevant land, the value as at the valuation date of the interest in the relevant land that was disposed of by the chargeable person or, where the disposal was a non-exempt sale, the "appropriate portion" (see final paragraphs of this section below) of that value,
- Where the chargeable person owned an interest in other property, the proceeds of which were used to acquire an interest in relevant land, such part of the value of the relevant land at the valuation date as can reasonably be attributed to the property originally disposed of by the chargeable person or, where the original disposal was a non-exempt sale, to the appropriate portion of that property,
- If the contribution condition applies, such part of the value of the relevant land at the valuation date as can reasonably be attributed to the consideration provided by the chargeable person.
V is the value of the relevant land at the valuation date.
The 'rental value’ of the land for the taxable period is the rent which would have been payable for the period if the property had been let to the chargeable person at an annual rent equal to the annual value. The annual value is the rent that might reasonably be expected to be obtained on a letting from year to year if
- The tenant undertook to pay all taxes, rates and charges usually paid by a tenant, and
- The landlord undertook to bear the costs of the repairs and insurance and the other expenses, if any, necessary for maintaining the property in a state to command that rent.
The rent is calculated on the basis that the only amounts that may be deducted in respect of the services provided by the landlord are amounts in respect of the cost to the landlord of providing any relevant services. Relevant service means a service other than the repair, insurance or maintenance of the premises. In other words, if the landlord provides other relevant services, for example the maintenance of the common parts in a block of flats, that are reflected in the rent then the cost of providing those services may be deducted from the rent.
The regulations do not specify the sources from which the required valuations should be obtained. However we would expect the chargeable person to take all reasonable steps to ascertain the valuations, as they would do if, for example, they were looking to let a property on the open market.
Paragraph 4(4) introduces the concept of a 'non-exempt sale’ for a disposal which is a sale of the chargeable person’s whole interest in the property for cash, but which is not an excluded transaction as defined in paragraph 10. The 'appropriate proportion", which is relevant for ascertaining the "appropriate rental value in paragraph 4(2), can be determined using the formula
MV – P |
MV |
Where MV is the value of the interest in land at the time of the sale and P is the amount paid.
Example
A sells his house to his daughter for £100,000. It is worth £300,000. He lives in the house. In these circumstances we would say that only two thirds of the value of the house is potentially within the charge to POAT. However, since he made a gift of that two thirds we would accept that he is protected under para 11(5)(1) reservation of benefit from a charge on that two thirds. Note that if he sold part of his house to his daughter at an undervalue then the non-exempt sale provisions would not apply. So in the above example if he sold half his house to his daughter for £100,000 and that half share was in fact worth £300,000, although he would have reserved a benefit in two thirds of that half share, the £100,000 cash would be subject to POAT.
2.2 Chattels (Sch 15 para 7)
The chargeable amount in relation to any chattel is the appropriate amount, less the amount of any payments that the chargeable person is legally obliged to make during the period to the owner of the chattel for the possession or use of the chattel by the chargeable person.
The appropriate amount is
N x |
DV |
V |
N is the amount of the interest that would be payable for the taxable period if interest were payable at the prescribed rate on an amount equal to the value of the chattel at the valuation date. The prescribed rate is the official rate of interest at the valuation date. The official rate has the meaning given in section 181 of the Income Tax (Earnings and Pensions) Act 2003.
Example
In 2005/6 A was caught by schedule 15 in respect of an earlier disposal of chattels. The chattels were worth £1,000,000 at the relevant valuation date on 6th April 2005. He will be treated as receiving a taxable benefit of 5% (the prescribed rate in 2005/06) x £1m = £50,000’
Note that the charge is computed differently from land and while any rental payments made to the owner will reduce the amount on which he is chargeable, the fact that he pays a market rent for their use does not prevent an income tax charge arising. Hence if he pays £10,000 rent he will still be taxable on a £40,000 benefit. Tax is due on 31 January 2007 unless A elects.
The provisions for ascertaining DV, V and defining a "non-exempt sale" and the "appropriate proportion" in relation to chattels that are similar to the provisions relating to land (see 2.1 above).
2.3 Intangible property (Sch 15 para 9)
The chargeable amount in relation to the relevant property is N minus T.
N is the amount of the interest that would be payable for the taxable period if interest were payable at the prescribed rate on an amount equal to the value of the relevant property at the valuation date. The prescribed rate is the official rate of interest at the valuation date. The official rate has the meaning given in section 181 of the Income Tax (Earnings and Pensions) Act 2003.
T is the amount of any income tax or capital gains tax payable by the chargeable person in respect of the taxable period by virtue of any of the following provisions
- Sections 547, 660A (now s.624 of the Income Tax (Trading and Other Income) Act 2005) or 739 of the Income and Corporation Taxes Act 1988,
- Sections 77 or 86 of the Taxation of Chargeable Gains Act 1992
so far as the tax is attributable to the relevant property.
Example
Mr A is the UK resident and domiciled settlor of a non-resident settlor interested settlement. (You should assume that Mr A has not reserved a benefit in the settled property nor has an interest in possession in the trust and is therefore subject to the POAT charge).
The settlement comprises 'intangible’ property of cash and shares with a value of £1,500,000 at the valuation date. In the tax year 2005/06 the trustees receive income of £60,000 which is chargeable to income tax on Mr A under s.624. A further £150,000 Capital Gains are realised which are deemed to be Mr A’s gains by virtue of s.86 TCGA ’92. In these circumstances £24,000 Income Tax is payable on the £60,000 and £60,000 in CGT on the £150,000. The tax allowance (T) against the potential Schedule 15 charge is therefore £84,000. The chargeable amount (N) is 5% (the prescribed rate in 2005/06) x £1,500,000 = £75,000. Since the tax allowance is greater than the chargeable amount, a charge under Schedule 15 will not arise.
2.4 Avoidance of double charge to Income Tax
The Schedule contains two provisions to avoid a double charge to income tax arising if the provisions of this Schedule apply.
- If the chargeable person is subject to the charge under more than one provision of this Schedule, i.e. if they were chargeable under paragraph 3 in respect of land they occupied and also under paragraph 8 (intangible property) if the land was owned by a company whose shares had been owned by them and had been settled on trusts of which they were a potential beneficiary, the charge will only apply to the provision that produces the higher amount of tax. If this amount does not exceed the de minimis limit no tax will be payable – the lower amount is disregarded completely.
- If the chargeable person occupies land or possesses or uses a chattel and is chargeable to income tax under the provisions of this Schedule and under the benefits code of Part 3 of the Income Tax (Earnings and Pensions) Act 2003, the provisions of Part 3 have priority. Tax will only be chargeable under this Schedule on any amount that exceeds the amount treated as earnings under Part 3.
