What is Pre-Owned Asset Tax (POAT) and when does it apply?

Full answer

POAT was introduced in 2005 to stop people avoiding inheritance tax by giving away an asset, usually their house, while carrying on living in it or benefiting from it. Instead of treating the asset as still in your estate, POAT charges you Income Tax each year on the value of the free benefit you receive - for a home, that is the rental value you would otherwise pay. It can also apply to chattels (such as valuable art) and to certain intangible assets in settlements. Who it affects: anyone who has gifted property or contributed to its purchase but retains use of it, where the gift-with-reservation IHT rules do not already bite. You cannot usually be caught by both regimes at once - if the asset is treated as remaining in your estate for IHT under the reservation-of-benefit rules, POAT does not also apply. There is a de minimis exemption: if the total annual deemed benefit across all assets is below a set threshold, no charge arises. Several gifts are excluded, including outright gifts to a spouse or civil partner and transfers covered by certain exemptions. An election can be made to opt out of POAT and instead have the asset treated as part of your estate for IHT. Worked example in principle: if you gave your home to your children but still live there rent-free, HMRC works out the open-market rent, deducts anything you actually pay, and taxes the balance as income at your marginal rate. The precise de minimis figure and the rental valuation are not set out here, so do not assume them - confirm current thresholds on gov.uk and take advice, as the interaction with IHT is technical. Because POAT exists to protect the inheritance tax base, model the underlying estate position with the inheritance tax calculator before relying on any gifting plan.

Try the calculator