What is it?
It is an income tax charge on benefits that a former owner continues to receive, or is entitled to receive, in respect of certain types of property that has been given away since 17 March 1986.
Property includes gifts of land, chattels and intangible assets, which includes life assurance policies.
Pre-Owned Assets Tax (POAT) was introduced by the Finance Act 2004 and became effective in the 2005/2006 tax year.
What types of trust are affected?
Broadly speaking, the trusts affected are those where: -
Money has been settled or transferred into them after 17 March 1986 and the settlor is a potential beneficiary but the IHT Gift with Reservation rules do not apply. The settlor does not need to be actually receiving an income or benefit for the tax to apply; he/she just needs to be potentially entitled to it.
How much tax is payable?
For life policies, the amount of the benefit that is liable to the tax each year is currently 4¾% of the policy value as at 6th April in the relevant tax year. The policy value will normally be the greater of the fund or surrender value unless the client is in serious ill health. The settlor will be liable to income tax on the amount of the benefit at his/her marginal rate of tax. Tax arising in the 2009/2010 tax year is due by 31st January 2011.
If the value of the benefit across all assets for one individual does not exceed £5,000, then income tax is not payable.
For Example
Total value of trust property affected = £105,000
Benefit = £105,000 x 4¾% = £4,987
Therefore, no tax due. However, where the value of the benefit exceeds £5,000, then the whole amount of the benefit is subject to income tax, not just the amount over £5,000.
If there is an amendment to the trust part way through the tax year, it is our understanding that the charge may only apply to the period when the benefit applied.
Example
Value of policy at 6 April = £175,000
Settlor is removed as a potential beneficiary on 1 September. Therefore benefit is deemed to have applied for 149 days. Therefore the benefit is calculated as
£175,000 x 4¾% x 149/365 = £3,393. As this is less than the £5,000 de-minimis limit, no tax should be payable assuming this is the only asset liable to POAT. However, whilst this is our understanding of the position, individuals should obtain their own legal and tax advice before taking any action.
Which Sterling trusts could be liable to POAT?
Over recent months we have reviewed our current range of trusts and we are very pleased to confirm that all of the Sterling trusts are not considered to be liable to POAT. However, there are issues with Sterling bonds taken out under the Zurich Wealth Trust. These issues are covered in detail on the Zurich microsite. You will need to login to the Zurich for Openwork microsite to see this information.
