Pre-Owned Assets Tax (POAT): When Giving Something Away Doesn't Remove the Tax Charge

Land (including the family home)

When it triggers: POAT applies to land where: (1) you formerly owned the land (or provided the funds to purchase it) and you no longer own it; and (2) you occupy or use the land. The classic scenario: a parent transfers their home to their children but continues to live in the house. If the gift with reservation rules (GWR) do not apply (e.g. because the parent pays a full market rent — which removes the GWR charge), POAT may apply instead.

The charge: The POAT charge on land is the 'appropriate rental value' — the annual rent that would be payable on the open market for the right to occupy the land — multiplied by the 'appropriate proportion' (the proportion of the total value of the land that corresponds to the donor's share of former ownership). The charge is an income tax charge on the donor, assessed annually.

Chattels (tangible moveable property)

When it triggers: POAT applies to chattels where: (1) you previously owned the chattel (or provided the funds to purchase it) and you no longer own it; and (2) you continue to have possession or use of the chattel. Example: gifting valuable furniture or artwork to your children but keeping it in your home for your own enjoyment.

The charge: The charge on chattels is calculated using the 'appropriate amount' — broadly, the annual value of the right to use the chattel. HMRC uses a notional interest rate (the 'prescribed rate') applied to the market value of the chattel as the annual charge. The prescribed rate is set by HMRC and changes periodically.

Intangible property (including cash and investments settled into trust)

When it triggers: POAT applies to intangible property (including cash and investments) where: (1) you settled intangible property into a trust; (2) you excluded yourself from benefit from that trust (so the GWR rules do not apply); and (3) as a result, the property in the trust is not included in your estate for IHT. The classic targeted scenario: EBTs and other trust arrangements where the settlor had ongoing access but the property was ostensibly outside the estate.

The charge: The charge is calculated on the 'chargeable amount' — the open market value of the right to use or enjoy the intangible property, assessed using the prescribed interest rate.

Is POAT an IHT charge or an income tax charge?

POAT is an income tax charge — not an IHT charge. It is assessed under income tax rules (Schedule 15 Finance Act 2004) and is collected through self-assessment or PAYE. However, POAT is conceptually linked to IHT: it arises where assets have been removed from the estate (reducing IHT) but the donor continues to enjoy them. POAT effectively taxes the enjoyment of those assets as income — acting as a partial substitute for the IHT that would have been collected if the assets had remained in the estate. The interaction with IHT: where POAT applies, the asset is outside the estate for IHT (it was genuinely disposed of). Where the gift with reservation (GWR) rules apply instead, the asset is inside the estate for IHT but not subject to POAT. POAT and GWR are mutually exclusive on the same asset.

When does POAT apply instead of the gift with reservation rules?

POAT was introduced because the gift with reservation (GWR) rules (Finance Act 1986 s102) were being avoided by various technical arrangements that achieved the same economic effect (donor gives away asset but keeps the benefit) without triggering GWR. POAT acts as a catch-all charge for these arrangements. POAT applies where: (1) the GWR rules do not apply (the asset is genuinely outside the estate); but (2) the donor continues to enjoy the asset. The most common situation where POAT applies instead of GWR: the parent sells the house to their children at full market value (so there is no gift — no GWR) but is provided with rent-free occupation. Alternatively, the parent gifts the house and pays a full commercial rent (removing the GWR — because there is full consideration) but POAT may then apply to the occupation.

What is the POAT election and when should it be used?

The POAT election (under Schedule 15 para 21 FA 2004) allows the taxpayer to elect that the pre-owned asset is treated as a gift with reservation — bringing the asset back into the estate for IHT but removing the POAT income tax charge. The election: (1) must be made in writing to HMRC; (2) is irrevocable; (3) takes effect from the start of the tax year in which it is made (with retrospective effect to the date of the gift in some cases). The election is beneficial where: the annual POAT income tax charge is more expensive than accepting the IHT position (i.e. having the asset in the estate); or the taxpayer accepts they will die within 7 years anyway (so the gift with reservation is IHT-inefficient regardless). The election should be considered carefully with a tax adviser — once made, it cannot be reversed.

Is there a de minimis threshold below which POAT does not apply?

Yes — POAT does not apply where the annual chargeable amount (the income tax charge) would be £5,000 or less. This de minimis threshold means that POAT is mainly relevant for higher-value assets where the annual benefit of occupation or use exceeds a level that generates a charge above £5,000. For example: a modest property with a low annual rental value may generate a POAT charge below £5,000 and would therefore be outside POAT. However, the de minimis is based on the total POAT charge across all pre-owned assets — if a taxpayer has multiple assets each generating a small POAT charge, the total may exceed £5,000 and all charges will apply.

Does POAT apply to the Ingram scheme or Eversden scheme arrangements?

POAT was specifically designed to target a number of IHT avoidance schemes that had been used before 2004, including: the Ingram scheme (where the donor occupied land at a peppercorn rent after carving out a lease before gifting the freehold); and the Eversden scheme (where a spouse occupied the family home via a trust structure). Finance Act 2004 introduced both POAT (for future enjoyment of pre-owned assets) and retroactive GWR rules for certain trust arrangements (ss102A and 102B FA 1986). Many taxpayers who entered these schemes before 2004 found themselves subject to POAT from 6 April 2005 (the POAT effective date) onwards. Those taxpayers were offered the election to opt into GWR instead.

What should I do if I have given away my home or other assets but still use them?

If you have given away your home, valuable chattels, or investments but continue to enjoy them, you should: (1) check whether the gift with reservation rules apply — if the GWR rules apply, the asset is already in your IHT estate (POAT does not arise); (2) if GWR does not apply (e.g. because you pay a full commercial rent), consider whether POAT applies to your situation; (3) if POAT applies, assess the annual POAT charge and compare it to the IHT cost of having the asset in your estate; (4) consider the POAT election if the income tax charge is significant and you would prefer to have the asset in the estate for IHT; (5) seek specialist tax advice — the GWR/POAT boundary is technical and the financial consequences of getting it wrong are significant. The interaction between GWR, POAT, and the IHT estate position should be modelled professionally.