Pre owned asset tax - advice please?

merlinthehappypig

I previously posted this in the 'cutting tax' forum, but didn't get any replies. Perhaps someone on here might be able to help.

I've had a good search on the forums, but whilst I can find reference to this tax, I can't pin down exactly how it applies to us (or not).

The HMRC site has a section on it, but it's impossible to cut through the detail to make sense.

My parents in law have sold their house & have, at least temporarily, gifted the money raised to my wife. The plan was that we would buy somewhere big enough for all of us as they are no longer able to care for themselves. It's on hold at present due to my FIL's serious illness and may now not happen, but I'm trying to dot all the i's & cross the t's before doing anything else.

Despite their estate, should they die, being well under the IHT threshold I have a feeling that we might get caught under the pre-owned assets tax (POAT) unless we are careful.

My understanding is that, if they gift us any of the money from the sale of their house, we use that to help buy a house and they live with us, then POAT might apply unless they pay full market rent for their share.

From reading about this it appears that it is a relatively simple matter to complete form IHT 500 to elect for the money to remain within their estate for IHT purposes. Their entire estate is only worth about £200000 so that isn't an issue.

I'm going to take proper advice on this, but would appreciate any comments about whether or not POAT would apply in these circumstances and whether my understanding of the situation is correct before seeking this advice.

I don't want to rock the taxman's boat if we don't need to, but neither do I want a large and unwelcome tax bill some way down the line.

It seems to me that a lot of people will get caught out by this tax who correctly think that their estate is free from IHT, but have no idea that this tax has been introduced. It's unlikely to catch the IHT dodgers for whom it was set up, just a lot of other people who have innocently been trying to help out relatives in their old age.

localhero

Hi,

A similar situation to you arose elsewhere on the forum, in which several issues arise - namely IHT and liability to care fees.
Here is the link to the thread:

http://forums.moneysavingexpert.com/showthread.html?t=833809&highlight=iht

If you decide to instead complete the IHT500 then you will need to read the accompanying notes IHT501. Here's the link for those:

http://www.hmrc.gov.uk/cto/iht501.pdf

sdooley

It is an odd tax because as you say almost no-one will pay itat the appropriate time and very few people will pay it anyway. I would think that your parents in law electing back in to IHT may be appropriate if the pre-owned asset tax applies to them.

However on a technical analysis your parents in law may not really have given away the monies anyway as there was an agreement that they would be used towards a bigger home for you to all live in. Your parents in law would on that analysis have made a gift with a reservation of benefit for tax purposes and so the cash was always in their estate for inheritance tax anyway, so pre-owned assets tax wouldn't apply.

Although you all get on now, I think it would only be fair to your parents in law (and you) to have a written agreement in place (which could be a trust by them over the £200,000 or a contract between you all) saying what would happen to the money in a number of situations. Some of these you might b able to discuss between you like what happens when someone dies, needs to go into care, or if you need to move for work or sell up due to financial difficulties. However other issues such as the impact of divorce or bankruptcy might be more difficult to discuss. Ideally you want a structure that is flexible enough to deal with changing family circumstances but clear enough that no-one is going to have any arguments when decisions have to be made.

merlinthehappypig

sdooley wrote: »

It is an odd tax because as you say almost no-one will pay itat the appropriate time and very few people will pay it anyway. I would think that your parents in law electing back in to IHT may be appropriate if the pre-owned asset tax applies to them.

However on a technical analysis your parents in law may not really have given away the monies anyway as there was an agreement that they would be used towards a bigger home for you to all live in. Your parents in law would on that analysis have made a gift with a reservation of benefit for tax purposes and so the cash was always in their estate for inheritance tax anyway, so pre-owned assets tax wouldn't apply.

Although you all get on now, I think it would only be fair to your parents in law (and you) to have a written agreement in place (which could be a trust by them over the £200,000 or a contract between you all) saying what would happen to the money in a number of situations. Some of these you might b able to discuss between you like what happens when someone dies, needs to go into care, or if you need to move for work or sell up due to financial difficulties. However other issues such as the impact of divorce or bankruptcy might be more difficult to discuss. Ideally you want a structure that is flexible enough to deal with changing family circumstances but clear enough that no-one is going to have any arguments when decisions have to be made.

Excellent advice and something that has already been addressed in this case. It just seems to be a case of getting one thing sorted out, then something new raises it's head!