Mark McLaughlin looks at the pre-owned assets tax charge, and its connection with inheritance tax planning. Planning to mitigate a particular tax can sometimes have an unforeseen knock-on effect for other taxes.

A Nasty Surprise?

For example, ‘pre-owned assets tax’ (POAT) is an income tax charge, which was introduced to block certain ‘unacceptable’ inheritance tax (IHT) planning arrangements. The POAT rules (in FA 2004, Sch 15) broadly charge income tax on benefits received by former owners of three categories of asset (i.e., land, chattels or intangibles in a settlement), where certain conditions are satisfied. Consequently, if an individual has (say) disposed of land, or has contributed towards the acquisition of the land but occupies it, they are potentially liable to POAT. The amount chargeable to income tax is broadly the ‘appropriate rental value’ less any payments (e.g., rent) that the individual is legally obliged to make to the owner in the period for occupying the land. Ominously, POAT can potentially be triggered by ‘innocent’ transactions (i.e., not undertaken as part of IHT planning arrangements).

Example: House Bought Using Cash Gift

Sally made a cash gift of £350,000 to her adult daughter Sarah on 6 October 2020, which Sarah used to buy her first home. Subsequently, Sarah was sent by her employer to work in the USA indefinitely and moved to Chicago. Sally moved into Sarah’s house on 7 April 2025 and occupied it rent-free. She is subject to POAT from that date (NB see also HMRC’s Inheritance Tax Manual at IHTM44049).

Escape from POAT!

Fortunately, there are various exclusions and exemptions from a POAT charge.

1. Exclusions – These include:

• Disposals of property at full value.
• Transfer to (or for) a spouse or civil partner.
• If certain IHT exceptions apply.
• Cash gifts (i.e., if made at least seven years before the chargeable person first occupied the property).

2. Exemptions, etc. – These include:

• Still in the person’s estate for IHT purposes (in most cases).
• The ‘gifts with reservation’ (GWR) IHT antiavoidance rules apply (NB Some transactions are excluded from both a GWR and POAT charge, if certain conditions are satisfied. This covers certain exempt gifts for IHT purposes. It also includes certain acceptable sharing and occupation arrangements for GWR purposes).
• Foreign exemption applies (i.e., POAT does not apply to a person for any tax year during which they are not resident in the UK, or are UK resident but not long-term UK resident), unless the property is situated in the UK.
• £5,000 de minimis (i.e., no POAT charge arises broadly where the combined POAT amounts for land, chattels and intangibles do not exceed £5,000 for the relevant tax year).
• Deeds of variation, etc., – these are generally disregarded for POAT purposes.
• Guarantees of a loan.
• Partial equity release (e.g., if the disposal was at arm’s length to an unconnected person, or the disposal was on arm’s length terms for consideration not in money or readily convertible assets).

If no POAT ‘let-outs’ apply, an election is available (on form IHT500) not to be subject to a POAT charge, but to be treated as being subject to IHT instead. Consideration could be given to which regime is more tax-efficient in the circumstances.

Practical Tip

The POAT rules are complex. Detailed guidance is included in HMRC’s Inheritance Tax Manual (at IHTM44000-44116). However, expert professional advice is strongly recommended in cases of doubt.