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Pre-owned Assets Tax

01 September 2004 / Charles Hutton
Issue: 3973 / Categories:


Pre-owned Assets Tax








CHARLES HUTTON presents a method for determining whether clients are caught by the pre-owned assets tax.





Pre-owned Assets Tax








CHARLES HUTTON presents a method for determining whether clients are caught by the pre-owned assets tax.




A RADICAL CHANGE, perhaps one of the most radical changes to United Kingdom tax law for many years, was introduced by the pre-owned assets tax (now commonly abbreviated as 'POT'), which comes into effect from 6 April 2005. Trustees and private client advisers must now come to grips with this change. The pre-owned assets tax bolsters the existing inheritance tax gift with reservation of benefit provisions. Alarmed by the number of schemes designed to save inheritance tax on the family home in particular, the Government has sought to introduce a tax which both captures those schemes already in place and dissuades taxpayers from implementing them in the future. This has resulted in some eleven pages of legislation — Schedule 15 to the Finance Act 2004. Had the Government been content merely to block these schemes for the future, the addition of a few lines to section 102 and/or 103, Finance Act 1986 would have sufficed.


Referring to the title of my article, a 'POThole' is my acronym for a situation in which the pre-owned assets tax applies. This article does not examine ways of avoiding POTholes, nor how to clamber out of them, but to suggest a procedure to follow in considering whether a client is in a POThole in the first place. Schedule 15 is complex and it may well not be immediately clear whether the client is affected. Often a client will initially appear to be caught by the pre-owned assets tax, but will be able to rely on one of the exclusions or exemptions; a structured approach is the best way of considering whether any of these apply.


Set out on the next page is a flowchart. Start at the top of the chart and if, in the client's circumstances, there is no path provided for the answer to any question, then the POThole has been avoided and the pre-owned assets tax does not apply. If, having worked through the chart, the client (the chargeable person) ends up in box 19, then he has fallen into the POThole and has a pre-owned assets tax problem.


The wording in the boxes is, of necessity, a précis of the legislation and reference should always be made to the relevant paragraph in Schedule 15. Looking at each box in turn, I would make the comments in the Notes below.


Charles Hutton is a solicitor in the private client department of Speechly Bircham. Telephone: 020 7427 6400 or e-mail:




Notes. Numbers refer to flowchart boxes

1 The pre-owned tax charge only applies to persons who are resident in the United Kingdom during the year in question.

2-6 The taxpayer's domicile (in the sense given by Inheritance Tax Act 1984) is relevant. A person who has always been United Kingdom domiciled is potentially liable to the pre-owned assets tax on assets anywhere in the world. A person who was formerly non-United Kingdom domiciled is not liable to the pre-owned assets tax on excluded property (within the meaning of section 48(3)(a), Inheritance Tax Act 1984). A person who is non-United Kingdom domiciled is only potentially liable in respect of property situated in the United Kingdom.

7 If the client is still within the chart (and on course for the POThole), it is now necessary to consider the nature of the property. Schedule 15 deals separately with land, chattels and intangibles.

8 In the case of land, the person needs to occupy it. It appears that merely receiving rent from it does not bring it within the pre-owned assets tax.

9 For chattels, the test is whether the person is in possession of, or has the use of, the chattel.

10 The scheme of the legislation is different for intangibles. The pre-owned assets tax only applies if intangibles are held in a settlement and section 660A, Taxes Act 1988 treats any income from the property as being the client's. However, the test here is narrower than under section 660A as, for the purposes of the pre-owned assets tax, it does not matter if the client's spouse (but not the client) can benefit.


11 & 14 In the case of land and chattels, it is now necessary to consider whether the disposal condition or the contribution condition applies.

12 & 13 The two conditions are virtually the same for land and chattels, but in both cases are widely defined and reference should be made to the relevant paragraphs in Schedule 15.

15 & 16 There is a limit to the retrospective nature of the pre-owned assets tax. Disposals or contributions (or, in the case of intangibles, additions to a settlement) made before 18 March 1986 are ignored.

17 For land and chattels, one of the excluded transactions in paragraph 10 may prevent the taxpayer falling into the POThole. Paragraph 10(1) sets out the excluded transactions applicable to the disposal condition and paragraph 10(2) sets out those applicable to the contribution condition. It seems sensible to consider, at this point, whether the guarantee exemption in paragraph 17 applies.

18 If none of the excluded transactions is any help, one of the exemptions set out in paragraph 12 may apply. Unlike the excluded transactions, the exemptions apply to all three classes of property: land, chattels and intangibles. Logically, cases where the property concerned was only owned prior to a change in the distribution of a deceased's estate should be considered here.

19 If the client is still within the chart and the total pre-owned assets tax payable exceeds £5,000, he is in a POThole and is going to require further advice!



Issue: 3973 / Categories:
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