DISCUSS THE POSITION REGARDING THE TAXATION OF PRE OWNED ASSETS!, COMMENTING SPECIFICALLY UPON USE BY THE DONOR AND GIFTS WITH RESERVATION OF BENEFIT. ‘While the Teasury might net be amused by the comparison, “Tom and Jerry” cartoons and the use ofthe POAT legislation by the goverment have many similarities. Since the intodetion in the Finance Act 1986 of the parallel ules on “gifts with reservation of benefit" and “potentially exempt transfers” the industry of tax avoidance, spestheaded inthe City of London and then copyeatted throughout the eauntry, has beon engaged in a frenetic gnme of ext and mouse with the Revenue, Schemeshave been devised, marketed toa willing public that is morally (eighty or wrongly) opposed to inertace tax and then dissected and challenged by the Revenue’s officers at every tum, It could even be tid that the spinoff fom his is thatthe Revenue has been less forgiving of innocent blunders by less sophisticated cients, lawyers and accountants; an ‘adversarial system entrenched in taxation practice that pits government agsinst Joe public. Are the wheels coming off our democracy? ‘The Pre Owned Assets Tax POAT" (ot at sometimes described, the “PRAT") tax is meant to perform two fuetions. The fist is o shore up the racks in the rales on “GROBS AND PETS", (1) and the second as a general shot across the bows of those who would seck to avoid inheritance tx by schemes designed to circumvent Revenue legislation. The Potentially Exempt “Transor “PET regime inadced in 1986 was intended to encourage timely giving by allowing ime ifs to be made, fee of Inritance tax, every seven years. The “Gift With Reservation ‘of Benefit” GROB regime enforced this by stating that those gts made hed to be genuine, with ‘refered woughout 2s POAT 2onoano benefit tall reserved to fe donot. Hence, I give you my house, fine, but i give you my house and carry on ing there Fen fee, the benefit reserved is cler, and there will be no ‘exempt tmnt, asthe gi, he trans, never ell aecured. By the time POAT was fir announced in December 2063, a myriad of schemes existed tht managed to got around the ‘OROB regime, and these sehemes were being rolled ou in the county, not jst fr high net worth nivduas but in ther, for anyone with a tree bedroom house inthe SouthEast of England, Such an individeal would have sufficient asses in their or thei and heir panne ames to exced the then nil ate band allowance of cre 250000. However, he PET regime ‘would not hep as the vale arisk of THT was largely in he matimonial home, which coud not simply be given avay, nor could a marks et be pid without reacing one’s standard of vin, Feat not however! One's hel provincial solicitor was at hand, and the use a ham loans doublets, reversonay less and cash gifts wer all being employed to enable one to have ‘e's cake and cat it to remain in eccuptin rent tee with no tx payable on deat forthe rivilge. The Revenue were well ae of thi, nd as Tom would have, they pursued Jy all ‘he way to court, ich, sadly for them culminated in defeat, notably the Ingram and Eversen cases in which the clever schemes were upheld as non-contravening the GROB rules. The Revenve's rection was fo slate, which brings us to POAT, The trouble is, for various reasons hist doesnot just clamp dow on various schemes, Nor does it simply extend the ‘GROB rules. Instead it inrauces another layer of leptin onto one which was already far fiom simple. Problem one the laws are now too complex. Furthermore it isso broadly drafted ipl ly {9510 catch innocent and non avoiding individuals in its net, Problem two, i erste unfstess, Subject to limited exceptions, the POAT rules impose an annual income tax charge on individuals who continue to benefit fom assets that they have given away, in circumstanceswhere the GROB rules do net apply to that gi, Accordingly the bred principle is hat the i should be ether potentially subject to THT, or to POAT, but not to both. Transactions enered Jno at any time since 17 Narch 1986 can trigger a charge, in respect of land, chattels and mangle, and the legislation, intoduced in Schedule 15 of the Finance Act 2004, provides for ly diferent rales ecortng to these thes catgories. In eopest of an, an individual will be lable if he occupies iad satis cither the “uispose” condition or the “contibution” contin Put simply, ether he previously sold the land and is now living in it ei, he previously gave money to someone who boveht the house he snow living in. ithe applies, ho wil have to pay POAT, which wil be levied on im a a income tax chars; he is domed to the income” of et ee living, and this income i exe. Even a novice to tx law, and particularly a conveyances, who thinks about ths sttement for fe moments and considers the ‘myriad of situstions that this road rule covers wil how ther hands up in despair. OF coarse, there area number ofboth “excluded tansations" and “exemptions” hat sofen the blow, but ‘because the leslation stats fom the broad premise and then exempts scenarios rather than ‘simply outlawing specific instances, there is « greater chance of common transactions being ‘caught that were done withoxt IAT planning in mind, or ever any THT benefit tobe obtained, Hence, we now have situation where an individual whose estate is within the IIT threshold and would never be subject to it could still be made subject to a tex designed to stop THT avoidance, Bxclsions ‘As the legisltion was drafied so broadly, abroad exclusion protecting uch people, who have no Intention to avoid, a “mens re” test for instance, would perhaps have been the buffer requited to 03)prevent this unfilmess, However, the exemptions and exclusions are nartow and complicate, ‘They ovelap and not neatly ith the GROB eales. ity the poor practitioner in a midstier fem, trying to keep costs down ard stil provide sound advice! The key to doing so is in a detailed understanding of the ways ia which the Revenue has provided for an individual who is prima facie in the POAT net to be let off the hook. These are set out in the legislation “exclusions” and “exemptiors". Thor ae several exclusions, sihily diferent depending upon ‘whether a disposal ora contribution iin question. They are found in paragraph 10 of Schedule 15 (seton 84) and include, ine ai 1, Disposal ofthe wholeastt at arm's length 2, Transfers between spouses 3. Contibtions made a east 7 years prio o oceupation For ann length gisposals, the exclusion i surpesingly inflexible. The dsposl mus be f the ‘whole asst, disposals of pat of an ast even for fll onsdeation do mt gain the exclision ‘This ap forthe unwary, and the injustice erate was ase by lobbyists with miners ‘with heres that on March 2005 the Paymaster General sue a saement on he mater and subsequent secondary legislation ensued. This extends the exclusion so that twill ppl to some sales of pat where iter the sal so (eset) a commercial entity ora connected person. ‘The extension to inelude sles to commercial entities enables equity release schemes availble in the makxplace to continue to operate, The extension ses to connected persons isnot so stmightorward, It tpultes that such sles must be on such terms as would exist between non- ‘connected persons ie. at matket rate, and the disposal was for consideration notin money a in the form of readily converte assets or the disposal was male before the sboveeférenced ‘ministers statement. Consequently, all new patt sales to connected persons for eash will nottin the benefit of the exclusion. There is therefore a very limited range of options within the {amily in this respect, with the payment fora building extension or loft conversion being cited as, possible allowable transactions, Given the tough financial conditions imposed by most eq release companies, andthe naire inclination of nvduls retain some lg interest in their ‘ome, one ses lage numberof POAT lable teasastions occuring inthe itr, unknown to the panisipstors uti ston late. Consider the widow whose children have helped her financially by buying a share ofthe house for csh. She is in occupation and she has disposed of the lan, she therefore sities the oscuption and cotton condos. Tete seems itl Jogic in penalisng her because the disposal was not ofthe whole, but POAT will apply. Second the taster of propety by an individual 0 his spouse wil bean excluded transaction, which asthe efit of nihing the “asposa” forthe purposes ofthe disposal condition. However, while the excasion will apply on tansfer oa former spouse (upon a court oer, there sn et out ifthe rane as tken place porto mariage. Tiss anther tap. IF give ‘my patie cash to purchase a house which we then live a, the contibtion condition is breached and POAT becomes payable, Apparently, even ie subsequently marry, there Wl be no protetin from POAT afta the date of he marrags!® hie, contibutons made seven year rir to oeupation must be of cash, which could catch out a individual who gifts say, shares to another which are subsequently sold and used to purchase property which the donor moves into seven yeas in the future. This is subject fo the tracing rules of reserved benefits, wi applicable, would bring the property back into the donor's "ore ome ses zd tx planing strates, Chamberanand Without page 2‘slat for HAT and thereby outside ofthe scope of POAT. Either way, the need for advice is Bxemptions ‘These are found in paragraph 11, the two most useful being the “ownecshi” and the “reserved benefit” exemptions. Unlike excluded transactions, these apply to sted intangible property as Well as land and chatels. However, it is considered generally preferable to have a transaction ‘excluded under paragraph 10 “hen exempt under peragraph 11, as will be shown below, Fit, ithe propery in question remains part ofthe taxpayer's eae for IIT purposes then its ‘Within his “ownership and theehy exempt, This rule i ao extended to other property inthe ‘donor's esse which derives its vale from the elevant and or chatels. Moreover, the property ‘ay not actully be THT twable on death, due tothe sil rte band or spouse exemption for instance, but because, ria fai it part of his aggregale estat, it willbe exempt under tis eoing. A ikely scenario where the exemption may apply will be whet an individual retains an intrest in possession in seted propery. Quite offen and elderly lint wil consider transfering the matrimonial home into an intrest in possession tut for herself for lie remainder to he children, with the intention of protecting the ast from being epplied to pay for her care, As she continues living in the house the disposal and occupation cond ed, and the disposal isnot excluded under paragraph 10. However, for s9 long as she ‘etains an interest in possesion she will be exempt from the POAT charge, However, ifthe Interest in possession ceases while she is alive and continues to occupy the property, then the charge again apply. Contrasting this wth the rales on exclusions, ifthe orignal transaction “see exemption, belowwas an excluded one, then it would remain excluded notwithstanding this change in Furthermore, if the donor doesnot wish to pay POAT but the asset in question is successfully of his estate, he can gin the benefit of the exemption by “electing” for THT to apply to the asset previously owned, via form THT $00. However, thee ae time limits to be observed, and not every situation will be approeiate.” Second, ‘ules, then it will be exempt from POAT. As aforementioned, the intention is that ther POAT. is subject tothe reservation of benefit rules (ris specifically exempt from those ‘oe INT will apply, but not buth. The problem with the exemption is that i isnot always clear \hether or not the GROB rules will apply as those rues, themselves grafted ont the IHT rules, ‘are not perfectly drawn. It remains unclear, for instance, whether certain ofthe revetsionary lease schemes are aught bythe GROB rules, Be tha asthe case may be, knowledge of GROB is crucial to an understanding ofthe POAT rules, not justo pprecite when GROB applies and therefore exempts POAT, but to be able to advise cients of the significant let outs fom it that se indieatly lable. Therefore, the several exemptions fo GROB contained within s102 FA 1986 mus be studied in dt, They include gis to charts and police parties, gf of and co-owned wih the donee, gifs of land fllowed by ocupstion fr ful consideration and gis followed by «change in he donor's circumstances. The one mort isto bring a sigh of reiet tothe practitioner f contained in s102B(4) FA 1986 which applies to shared occupation of land by donor and donee, It is notunusual fora parent to give a share in hes home to a child in his ‘oF her fortes who remains in occupation with them and shows no intention of either getting * See belowmarred or moving out, usually by way of natural recompense for helping them maintain their als as they grow older. SIO2B(4) exists to ensure that such a gift is not eaught by the reservation of benefit rules, so long as no consideration is made forthe git fr instance bythe ‘dul hil paying forall of te househol's outgoings. The transfer Full both the disposal and ‘oecupation extra, but unde the exer available, if the transfer of valu is consequently sai fom GROB, it will aloe safe from POAT. Bear in mind ofcourse that if the child were to ‘move out, the property would then be subject to GROB. ‘Last but not least, and actualy nether exclusion no exemption, are the £5,000 annual exemption ‘and the rules on “de minim” occupation, Iti hoped that these will operate to “sweep up” ‘many of the ible arrangemeat, entered into without motive, thet equate to no more than £5,000 ental value per annum or where limited use of the land o other is taken up by the donor. For ‘the former, valuations wil generally be required. Whi the allowance is of benefit, assuming @ ‘notional value of £100,000 groducing £5,000 per annum, there may be many borderline cases, ‘without intent, which cannot aval themselves of ether one. Having considered the main exclusions and exemptions to the rules, itis appropiate to reflect. ‘pon how to provide the best advice to one’s clients. There will be two generic situations in Which advice is required. The frst wil be resetively, where a client has entered into any of the aforementioned schemes designed to ctcurwent IHT, and now has to consider whether or not to unravel the work done on hisbehalf The second, proactively, pio to any transfers tuking place, \with careful thought given to the ramifications thereof. For those wit, for instance, “Ingram schemes to unravel, whereby, essence they have given away a propery and taken back a ent- five lease, the options ee lnited. They ean pay the income ax charge, which will obviously be ‘more practicable forthe clert oF advanced yeas with imited life expectancy. They ean cease to‘occupy the property, slihouph the associated operations rales may reduce the viability ofthis ‘option and the tems ofthe ks itself may not allow it, For the younger donor, they ean elect for the property to fl within he reservation of benefit rules, although this would be disastrous if ‘hey subsequently cease fo o:cupy it as he would then be making a deemed PET under section 1024) thereby restarting theseven year lack. Ifthe eliont sa all unsure abost his intention to ‘emain inthe property therefore, he should not be advised to make an election into GROB, In terms of proactive planning the first point to bear in mind i that, while THT schemes ate not generally subject to the rules on early disclosure to HMRC, schemes devised to avoid POAT Felate to income tax and may therefore requitedisclosure* Thereafter, greater use should be made ofthe basi INT exemptions and rele, partculsely the transferable nil ate band, etme aifts around a seven year cycle, and the hitheto largely frgoter, normal expenditure out of income exemption, These options, together with sharing arrangements protected by s102, commercial equity release schemes and flexible will planning will by and large, provide straightforward routes that donot fll oul of POAT, wiilst achieving sound estate planning for the client. The trouble is, fx every client prepared to take the time and expense to procure the advice, there will be another who does not. With the advent of “Tesco law”, how many ‘executors ill discover, when i perception of the layman, his acerued forthe last feen years and must now be paid, with Interest and penalties, The teesury may not se this asa stomm ina teacup, but this writer does. (© Christopher Cumberbatch, Marshall Hachick Solicitor, 2008 ‘Te inno consi inset fr gee ice aro ony- Wile al exile eno seinen i alae en Bn el airs may ace ‘evs esp rine aed eres ayrerceon Dope wk ie ae * bepenng an wheter th ote onions on ou rests