Budget "partially removes" pre-owned assets trap
22/03/2007
This week's Budget, say the Low Incomes Tax Reform Group, may help some, including low-income families, who are caught by a little-known rule designed to counter inheritance tax avoidance, but which can also catch ordinary family arrangements entered into with no thought of escaping tax.
A Budget press notice states that HMRC will be able to accept late elections to pay inheritance tax rather than POAT. The exact terms on which HMRC will accept late elections have yet to be announced, but this measure is a good outcome to discussions held over the past year by both the Chartered Institute of Taxation and the Low Incomes Tax Reform Group with HMRC.
Pre-owned assets tax (or POAT), introduced in 2005-06, is an annual charge to income tax on the annual value of assets which the taxpayer has given away but continues to enjoy in some form. It also catches situations where the taxpayer has contributed to the acquisition of property from which he or she later benefits.
When it was introduced on 6 April 2005, it was heavily criticised for being poorly targeted. Government’s answer was that if taxpayers were unwittingly caught by the rule, they could elect to pay inheritance tax on their death instead.
Since POAT is payable where the value of an asset exceeds, roughly, £100,000, and inheritance tax does not begin to be payable until a person’s estate exceeds £300,000 (in 2007-08), it is clearly advantageous for those whose estates are valued at between those figures to pay inheritance tax instead when possible. In addition, the inheritance tax in this case would be payable on death, while POAT is an annual tax on income while the taxable person is still living.
But the law prescribes a time limit for making the election – 31 January following the tax year in which the charge arose. This means that for a charge first arising in 2005-06, 31 January 2007 was the last date by which a person could opt into inheritance tax instead of paying POAT.
The news that HMRC will be allowed to accept late elections will particularly benefit those who may have done something unawares to attract the operation of POAT, and who might otherwise have had substantial arrears of tax being demanded of them when their liability to the charge was identified.