Taken From: http://www.nmd-law.com/contactus.htm

← Back

IHT - Beware the 'Pre-Owned' Asset

Beware the pre-owned asset

Various rules exist to prevent avoidance of inheritance tax by seeking to remove assets from one’s estate for inheritance tax purposes while continuing to enjoy the benefit of the assets.

As well as the gifts with reservation rules, there is also another set of rules – the pre-owned asset rules – which need to be considered.

What are the pre-owned asset rules?

The pre-owned assets rules impose a charge to income tax (rather than inheritance tax) in certain situations where you either give away an asset or sell it for less than its market value and you continue to use or benefit from it. However, it doesn’t apply if the gift is caught by the gifts with reservation rules (and therefore remains within the estate for IHT purposes).

What is caught?

The regime only applies to certain assets, namely:

  • land and property;
  • chattels (such as paintings or antiques); and
  • intangible property held in a settlor-interested trust (which includes shares, banks accounts, life insurance policies held in such a trust).

In the case of land and property, the tax charge applies if the taxpayer occupies land or property that he once owned, but he gave away all or part of his interest in that property. The charge will also bite if the taxpayer provided the funds to another person to buy the property, or he sold another property and gave the proceeds to another person to buy the property which he occupies.

For chattels, a pre-owned asset tax charge will arise if an individual possesses or has the use of a chattel he once owned but gave away, or if he provided funds to another person to buy the chattel which he enjoys. The charge also bites if he sold other chattels and gave the proceeds to another person to buy chattels which he enjoys.

There is no charge if the asset is sold to an unconnected third party for its full market value.

Need to know The provisions are complex and professional advice should be sought.

How does the tax charge work?

The tax charge is an annual income tax charge, which is based on the market rent for land and property, and for chattels, on the interest that would be charged at the official rate on the value of the chattel.

Example

Bill sells his house for £200,000 and gives the proceeds to his son John, who uses the money to buy a flat for Bill to live in. The market rent for the flat would be £10,000 a year. Income tax is charged on the £10,000 rental value each year under the pre-owned asset rules.

Any exceptions?

Yes, there are some exceptions. There is no charge if the annual charge under the regime is £5,000 or less. This means a couple could give away their property and continue to live in it if the annual market rent was £10,000 or less. There is also a charge if the gift is covered by the annual £3,000 gifts exemption for IHT purposes. Also outright gifts to a spouse or civil partner (or a former spouse or civil partner under a court order are not caught). Disposals that satisfy HMRC as being for the maintenance of the family also escape the charge.

 

 

 



 
Contact us for more information

← Back