Push the POAT out? Asset revaluation brings more property over the threshold

Push the POAT out? Asset revaluation brings more property over the threshold

Mon 15 Jun 2015

The pre-owned assets tax (POAT) was ten years old on 6 April 2015 but no party was held because nobody would have attended.

Introduced as a countermeasure against inheritance tax avoidance schemes, POAT applies to anyone who disposed of an asset after 17 March 1986 who subsequently occupies or enjoys the use of that property or property purchased using funds provided (directly or indirectly) by the donor without paying a market rent for it. POAT does not apply to arrangements already caught by the gift with reservation of benefit (GWR) rules that deem assets still to be within the donor’s estate but it does catch trust or other arrangements designed to place the asset, or replacement assets derived from the original gift, at the disposal of the original donor rent and IHT free or for a reduced payment. Very few arrangements potentially subject to POAT have been set up since 6 April 2005

De Minimis
For land and chattels if the amount chargeable to income tax under POAT is no more than £5,000, no POAT is chargeable.

 
How is the threshold applied?
Valuations as at 6 April 2015 are required for all assets potentially subject to POAT. There is one de minimis of £5,000 that applies to all POAT assets together, not to assets individually.  There is no de minimis on intangibles but so long as the settlor is assessed to tax on a greater amount under the income or capital gains tax settlor-interested rules there is no value chargeable to POAT.

If the chargeable value calculated for 2015/16 does not exceed £5,000, no POAT is payable for 2015/16 or any of the four following years (2016/17-2020/21) unless circumstances change to make him liable to POAT by reference to another asset.
Land is charged on the market rental value of the property; therefore a commercial rental valuation exercise must be carried out on all properties that are potentially subject to POAT.

Chattels held on settlor-interested settlements are charged on the official rate of interest; therefore those chattels must be valued and then subjected to the official rate of interest which for 2015/16 is 3%. Intangibles are charged according to a formula that compares the amount of actual income or gains assessable on the settlor with the notional income that the assets would return based on their market value and the official rate of interest.

 
The official rate has fallen
At the last main revaluation date, 6 April 2010, the official rate was 4%. Therefore the value of chattels or intangibles may have increased but their notional annual benefit value for POAT purposes may have decreased or not increased enough to cross the threshold.  The chargeable amount is then treated as the top slice of the chargeable person’s income subject to income tax.

 

Decision time
Donors who become subject to POAT in relation to any property, including where revaluation takes the annual value over the £5,000 threshold, can opt out of the income tax charge by electing for their original gift to be treated instead as a gift with reservation of benefit (GWR), meaning that the asset(s) will fall to be treated as part of their estate on death unless they take other actions such as paying market rent or making the property unavailable for their own use.


The first is a fact-based criterion; the second a value judgment that the taxpayer has to take after weighing up all relevant factors.

do assets enter POAT in 2015/16 due to revaluation
Assets subject to POAT require revaluation on a five-yearly cycle: for assets that would have been caught when POAT was introduced on 6 April 2005 but for falling below the de minimis threshold, revaluation as at 6 April 2015 may mean that that Rubicon has now been crossed.

Decision 2: whether to opt out of POAT
There are a number of factors to consider.
– Will the immediate POAT saving justify the long-term cost in IHT?
– The Government has announced its intention to introduce an additional IHT principal private residence allowance of £175k That may increase a couple’s effective IHT-free estate to £1m. Details are expected in the Summer Budget And we must wait until then to know:
–> if the new allowance will extend to residences not owned personally; and
–> who precisely can benefit from the new allowance.
– Are other means of mitigating IHT available?
– Can POAT assets be disposed of or taken out of the donor’s use/benefit?
– Is it worthwhile paying rent for assets?
– The official rate cannot be expected to remain low (at 3% it’s 1% lower now than in 2010). By the time the of next revaluation (if POAT is still with us) higher interest rates will mean higher POAT values for chattels and intangibles, so a POAT charge that appears low now may be replaced by a higher charge later as interest rates and asset values rise.

There is no need to rush the decision
For assets coming into POAT in 2015/16 the deadline for election into GWROB treatment is 31 January 2017, i.e. the 2015/16 tax return filing date. That date gives most people enough time to assess how property values are moving and what political changes are happening: the Government has only a slender majority and there is no guarantee that policy will not change.

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