Legal News | 8.08.24

A brief guide to the Pre-Owned Assets Charge (“POAC”)

Regular readers will have seen our recent newsletter on the gifts with reservation of benefit rules (“GROB”). This week we are focusing on the pre-owned asset charge (“POAC”)  which was introduced to restrict those trying to circumvent the GROB rules.  The POAC is very little known but can capture a variety of scenarios.

The POAC applies when a person gifts an asset but retains a benefit in that asset or property derived from the asset. Assets such as property or cash can be caught by the POAC rules.

The following illustrates a typical scenario that can be caught within the POAC rules:

1. A parent does not want to live alone and thinks it would be a good idea to live with their child and family.
2. The parent sells their property and gives their child a large chunk of the sale proceeds towards buying a larger property for the parent and their child and family to live in.
3. The child buys a new larger property with the money from their parent and the property is held in the child’s name.
4. They all live in the larger property together.
5. The parent does not pay any rent to the child for living in the property, as this is deemed unnecessary, as they contributed to the purchase price.
6. The parent is unaware that the benefit that the parent receives through occupying the property rent free is in fact treated as income which is chargeable to income tax and falls within the POAC rules.
7. If the parent had paid a market rent (advice should be sought to ascertain the appropriate market rent to pay to avoid the POAC) to the child for their occupation of the property, the POAC could have been nil.

In certain circumstances, it is possible to avoid the POAC annual income tax charge by instead opting into the gifts with reservation of benefit rules. By doing this, the asset you have gifted may be included in your estate for IHT purposes, but it negates the need to pay an ongoing rent. An election can only be made during your lifetime.

This area of the law is very complex and the above is a very brief summary of the rules. If you feel that you need advice on whether the POAC applies to you, please do get in touch with our Private Client team who can assist.