TT55: Prior Ownership Tax

August 22, 2004

Take care when you give things away!
This issue looks at the complicated and onerous rules introduced by the 2004 Finance Act in respect of the beneficial enjoyment of property that has been wholly or partly given away. Under these new rules an income tax charge given the acronym POT (Prior Ownership Tax) arises. The most relevant nuances of these rules are considered here and in the next few issues.
Inheritance Tax by the back door
The new POT rules are seen by most commentators as illogical and unfair. Their aim is to attack retrospectively various inheritance tax (‘IHT’) mitigation strategies previously upheld by the Courts. In essence, the Government has shied away from tightening IHT rules and has instead chosen to impose an income tax charge on various validly made arrangements. This charge commences on 6 April 2005, allowing Government Ministers to claim that it is not a retrospective measure. However, lawful transactions effected on or after 18 March 1986 are caught by the POT rules, so whatever it is labelled, it is retroactive in nature.
Not one, but three POT holes
The POT legislation has three distinct elements: there are rules concerning “land” (including property on land, leases etc.); there are rules concerning “chattels” (any tangible, movable property other than money); and there are further rules concerning “intangible property” (any property other than interests in land, or chattels). Thus, all possible assets are covered one way or another.
POT hole No.1 – Land
POT income tax arises if an individual occupies land in respect of which the “disposal condition” or the “contribution condition” is met. (If land is owned but not occupied (eg it is let to a third party), POT rules do not apply).

The “disposal condition” is met if, after 17 March 1986, the individual owned an interest in the land and has disposed of the whole or a part of that interest other than by an “excluded transaction”.

The “contribution condition” is met if, after 17 March 1986, the individual has directly or indirectly contributed towards the cost of land owned by another person.

Examples of “excluded transactions” are equity release schemes and such arrangements do have interesting IHT planning opportunities. There are also certain defined “exemptions from charge”, for example gifts inter-spouse and gifts to children who jointly occupy the property (subject to various complex rules).
What is the amount chargeable?
The chargeable amount is the amount of annual rent that would be payable in respect of the land in an open market let, less any rent actually paid. In the cases of part disposals of land and part contributions to the cost of land owned by someone else, the annual rent in respect of the whole property is apportioned. In the case of large residential properties, the POT charge could be a very large sum.

Watch out for information about *POT holes Nos. 2 and 3 in future issues!

Barnes Roffe Topical Tips

  • Review all transactions made after 17 March 1986 to see whether the POT rules apply.
  • Consider using IHT planning techniques such as the Reversionary Lease arrangement (see Topical Tips No. 47) for investment properties that are not occupied.
  • Consider using “excluded” or “exempt” arrangements such as quasi-equity release arrangements and/or part gifts of the family home to children who occupy the home.

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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