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Pre-Owned Asset Tax (POAT)

Also known as: POAT, POA Tax

Definition

Pre-Owned Asset Tax (POAT) is an annual income tax charge on people who continue benefiting from assets they previously owned or funded after giving them away.

POAT catches arrangements where you've removed assets from your estate for inheritance tax purposes but still enjoy their use—such as living in property you gave to your children or occupying a house your money helped purchase.

What Does Pre-Owned Asset Tax Mean?

Introduced by Finance Act 2004 and effective from 6 April 2005, POAT is an income tax charge designed to close inheritance tax avoidance loopholes. It applies when you've disposed of property, valuable possessions, or money but continue receiving benefits from them in ways that escape Gift with Reservation of Benefit rules. The charge is calculated based on the annual benefit you receive and taxed at your marginal income tax rate—20%, 40%, or 45%—depending on your tax bracket. You pay POAT annually through Self Assessment, making it fundamentally different from inheritance tax, which applies on death.

The legislation covers three types of assets: land (property), chattels (valuable personal possessions like antiques or jewellery), and intangible property in settlements (money or investments in certain trusts). Most POAT cases involve property—either giving property directly while continuing to live there, or giving money used to buy property you then occupy. Margaret gives her £400,000 house to her son David but continues living there rent-free. The annual rental value is £18,000. As a higher-rate taxpayer, Margaret pays income tax of £7,200 annually (£18,000 × 40%) for as long as she occupies the property. Similarly, James gives his daughter Sarah £180,000 toward buying a £450,000 house. Three years later, James moves in with Sarah. POAT charges him income tax on 40% of the property's £28,000 annual rental value—£11,200 annually—reflecting his contribution proportion.

POAT includes a £5,000 de minimis exemption, but it's an "all or nothing" threshold. If your annual benefit is £5,000 or less, there's no charge. If it exceeds £5,000 by even £1, the entire amount becomes taxable—not just the excess. Elizabeth's continued use of gifted antique jewellery provides £4,800 annual benefit. She pays no POAT. If the benefit were £5,100, she'd pay income tax on the full £5,100. Critically, POAT and Gift with Reservation of Benefit are mutually exclusive—if GROB applies, POAT doesn't. POAT exists specifically to catch arrangements that escape GROB rules but still allow donors to benefit from transferred assets.

You can elect to have the asset treated as part of your estate for inheritance tax purposes instead of paying annual POAT by completing Form IHT500. This election must be made by 31 January following the first tax year POAT would apply—missing this deadline means you cannot elect. The election makes sense if your estate is below inheritance tax thresholds or when annual POAT charges would exceed potential IHT liability. Exemptions beyond the de minimis include gifts between spouses or civil partners, certain arm's length transactions, and disposals made before 18 March 1986. Professional advice is essential before making significant gifts involving property or when intergenerational living arrangements are planned.

Common Questions

"Does Pre-Owned Asset Tax apply if I give my children money to buy a house?" POAT can apply if you later live in the property your money helped purchase. For example, if you give your son £150,000 towards buying a £300,000 house and then move in with him, POAT charges you income tax on half the property's annual rental value (reflecting your £150,000 contribution). The key trigger is benefiting from an asset you previously owned or funded, whether property or cash.

"How is Pre-Owned Asset Tax different from Gift with Reservation of Benefit?" POAT and GROB are mutually exclusive anti-avoidance rules. GROB treats the gift as never made for inheritance tax purposes—the asset stays in your estate for IHT. POAT is an annual income tax charge during your lifetime on benefits you receive from using the asset. Generally, if GROB applies, POAT doesn't, but POAT catches scenarios that escape GROB rules.

"Can I avoid Pre-Owned Asset Tax by paying my children some rent?" Paying less than full market rent doesn't eliminate POAT—it just reduces the charge. POAT is calculated on the difference between market rent and what you actually pay. Only paying full commercially realistic market rent eliminates POAT entirely. Token payments like £100 monthly when market rent is £1,500 won't significantly reduce the charge, and all payments must be properly documented.

Common Misconceptions

Myth: Pre-Owned Asset Tax only affects people deliberately trying to avoid inheritance tax.

Reality: POAT frequently catches well-meaning families in innocent situations, such as parents helping children buy homes and later moving in due to ill health or family circumstances. The legislation applies based on factual circumstances—whether you gave away an asset and continue benefiting from it—not your intentions. Many people trigger POAT through ordinary family arrangements without ever intending to avoid tax, simply not realising that helping their child buy a larger house would create tax consequences when they later needed to live with family.

Myth: If the annual benefit is under £5,000, only the excess gets taxed.

Reality: The £5,000 de minimis is a "cliff edge" exemption. If your benefit is £5,000 or less, there's no charge at all. If it exceeds £5,000 by even £1, the entire amount becomes taxable—not just the amount over £5,000. A benefit of £4,900 means no tax. A benefit of £5,100 means income tax on the full £5,100. This differs from typical allowance structures and can create substantial charges from small increases in benefit value.

Understanding Pre-Owned Asset Tax connects to these related concepts:

  • Gift with Reservation of Benefit (GROB): Alternative anti-avoidance regime that treats gifts as remaining in your estate for IHT purposes—POAT and GROB are mutually exclusive.
  • Inheritance Tax (IHT): POAT exists to prevent IHT avoidance; you can elect via Form IHT500 to have assets treated as part of your estate for IHT instead of paying annual POAT.
  • Property Gifting: Most POAT cases involve property transfers; always consider POAT implications when gifting property, especially if you might live there later.
  • Lifetime Gift: While lifetime gifts can reduce your estate for IHT, POAT can create annual income tax charges if you continue benefiting from gifted assets.
  • Income Tax: POAT is charged as income tax at your marginal rate (20%, 40%, or 45%) and declared on annual Self Assessment returns—not inheritance tax.

Need Help with Your Estate Planning?

Understanding POAT is crucial when planning lifetime gifts, especially those involving property or substantial amounts that might fund property purchases where you could later live or benefit from the asset.

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Legal Disclaimer: This glossary entry provides general information about UK legal terminology and does not constitute legal or tax advice. Pre-Owned Asset Tax rules are complex and interact with inheritance tax, income tax, and gift regulations in ways that depend on your specific circumstances. For advice about your situation, consult a qualified tax advisor or solicitor. POAT calculations, exemptions, and elections have strict deadlines—if POAT may apply to you, seek professional advice promptly.