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What is POAT?

POAT is an income tax levied since 6th April 2005 on the value of benefits still enjoyed in respect of assets which you gave away as long ago as 18th March 1986. It was introduced to catch people who undertook “artificial” Inheritance Tax (IHT) planning exercises, legitimately and successfully at the time, and to deter people from attempts to avoid IHT in future, particularly in relation to houses which they continue to “occupy”.

Unfortunately, some quite innocent domestic arrangements with the family home are caught, as are some business protection (partnership and shareholder) assurance plans.

Although already in force for several years, many of the rules are tricky to interpret. Taxpayers were originally given up to 31 January 2007 to decide whether to elect to unravel old IHT planning schemes, or to retain their IHT benefits but submit to an annual income tax penalty instead. A tricky problem for those with no cash to pay the POAT. As a self-assessed tax, the onus on you is to work out if you are liable to POAT. If not, you may be exposed to penalties and interest for late payment.

What does POAT catch?

It is easier to look first at what it does not catch, specifically assets which will in any event be caught by IHT and the “gifts with reservation” (GWR) rules. If you have escaped IHT or a GWR, by luck or design, you may be at risk of a POAT charge if you occupy land, having disposed of it, or contributed to the cost, subject to various exemptions.

There are separate rules applying to land, chattels, and “intangibles” (such as debts, insurance policies, royalties, and stocks and shares) held in a Trust. There are also “tracing rules” to follow cash gifts used by the donee to buy assets from which a benefit is derived within 7 years by the original donor of the cash.

There needs to have been a gift, sale or transfer of assets, or a cash contribution made. Land has to be “occupied” (including receipt of rents); chattels (pictures, furniture, boats, cars) have to be used or enjoyed; intangibles must have been put in a Trust.

If you went in for Eversden, Ingram, Double Trust or Reversionary Lease schemes to save IHT on your family home prior to 2003, you are likely to have been caught. Large cash gifts by parents to children, who later buy a house in their name for the parents to live in – perhaps to avoid a local authority means test for nursing care in old age – may also be caught.

How is POAT assessed?

In the case of land, the taxable benefit is deemed to be the annual rental value, fixed for 5 years and then reviewed. If caught you pay tax at your top rate (say 40%) on the rental value. If the monthly rental value is £1,000, the annual benefit is £12,000 on which tax at 40% would be £4,800 pa for 5 years and then reviewed.

In the case of chattels and intangibles, the taxable benefit is 5% of the capital value, as reviewed each year. If a picture is worth £200,000 the taxable benefit @ 5% is £10,000 and tax @ 40% is £4,000. If the market value has gone up to £300,000 next year, the benefit @ 5% is £15,000 and tax @ 40% is £6,000.

Exclusions & Exemptions

Cash gifts before 6 April 1998 escaped the “contribution” rules. House sharing arrangements between joint owners, and where a full market rent is paid for use of land and chattels, should be exempt. Sales at arms length between unconnected persons, gifts between spouses, and variations of provisions in a Will within two years of death, are outside the scope of POAT. People whose total benefits in a year do not exceed £5000 (eg a 5% charge on assets up to £100,000, or monthly rent not exceeding £416) will be exempt, as will foreigners living in the UK.

For those “caught” with old schemes which avoided IHT, there was an option to elect back into the IHT net by a deadline of 31 January 2007 to avoid a POAT charge. Election may cause other tax problems such as CGT.

IHT Planning in the POAT Era

POAT is mainly intended to punish people who undertook specific IHT schemes which involved the family home in years gone by, but also inhibits future IHT planning in some surprising ways. POAT does not affect most of the conventional strategies – eg a gift followed by survival for 7 years, investment in agricultural or business property, a number of insurance strategies, use of the £3000 annual allowance, and “Nil Rate Band Trusts” in Wills.

Certainly, anyone wanting to make gifts of the family home, holiday homes, or expensive chattels, and to retain some use, will need to take great care. A scheme involving a £325,000 holiday home  (ie within the IHT “nil rate band”) might bear no IHT, but could still be caught by a POAT charge of £5,000pa based on its rental value. Taking advantage of the exemptions for shared ownership, and paying a market rent under a formal agreement, may be part of the solution. Loans from children to parents, and sales of a part-share in a house, may be trickier than commercial “equity release” mortgages, or sale of the whole.

The Family Home

Basic guidance is to make gifts of part of a property, but to sell 100% and not part to avoid a POAT problem. Gifts of a part share in a house, where donor and donee both occupy it, such as child living with elderly parent, or at least staying regularly, should be protected from POAT provided the donor continues to pay at least a fair share of the outgoings. For example, in the case of a gift by the parent to children of a 75% share as tenants in common, the parent might still need to pay 50% of the running costs (not just 25%) to reflect a fair share of actual usage.

Perversely, a sale to a child of a share in a house at full market value is not a “gift”, so POAT may be chargeable. There has been a disposal followed by continued occupation by the parent to which the GWR rules do not apply. Even odder, a sale at an undervalue may be a gift to which the GWR rules would apply, and so no POAT!

Odder still, if a child purchases 100% of the parents’ house at a full price, there is no GWR and an exclusion from POAT for a transaction “as may be expected to be made at arms length between persons not connected with each other”. If the purchaser does not have cash and the parent agrees to leave the price outstanding, he will have to pay a full rent to remain in occupation.

Another worrying situation is a parent’s sale of their house, perhaps after the death of the first spouse, followed by a gift of cash to a child. The child uses cash to buy a bigger house within 7 years of the gift, and the parent then goes to live in the house. POAT may result, unless the parent is in a self-contained annexe, and not sharing common facilities in the main house.

Circular transactions, such as wealthy parent giving spare cash to a child who later uses it to buy the parent’s house which they continue to live in, may either result in a GWR by “associated operations” or if not then a POAT charge.

Holiday Homes

Co-ownership of a holiday cottage amongst a family is not unlike a shared family home. The basic rule (assuming parents wish to continue using the cottage) is for them to retain a small share, paying a fair share of outgoings, and not give away the whole. CGT on the gift is likely to be the parents’ biggest problem given recent price inflation.


There are no special POAT rules for farms, so general principles apply. Father taking son into partnership may give him a 50% interest in the land, while the son contributes labour as “full consideration”. Family farms were often subject to “shearing” arrangements under which a depreciating leasehold interest is retained, while an appreciating freehold interest is given away. An Agricultural tenancy may have been granted pre-1999 to self and other family members who farm in partnership, with the freehold reversion gifted in trust to the children. Rent reviews amongst the family can easily be overlooked, so the tenancy ceases to be at full market value. POAT might be applicable, although a GWR may take priority, until full rent is resumed.


Given that the POAT charge on chattels is at 5% of the capital value, pictures, furniture or perhaps classic cars, which have been given away, need to be worth over £100,000 in total before there is a risk of POAT. However, a gift followed by leaseback may be effective for pictures and furniture, as market rent is typically 1% of value.

Intangibles (Insurance Policies, Shares, etc) in a Trust

Insurance policies, particularly partnership and shareholder protection contracts, are vulnerable to POAT as it is quite common for them to be held in a Trust of which the settlor is a potential beneficiary. The arrangement may be regarded as “commercial” and so not caught as a GWR, but POAT will then apply. With the onset of ill health, a policy may acquire a high value because of reduced life expectancy. If value is at least £100,000 then 5% (£5000) could be taxed at 40%pa.

IOU Schemes in Wills

Nil Rate Band Discretionary Trusts in Wills whether funded by an IOU or not, remain a viable IHT planning tool, unaffected by POAT, as do post-death variations of Wills to achieve this result.

POAT Reviews

Old arrangements such as “double trusts” of the family home may need urgent  review if HMRC win the test case now in hand.