Inheritance tax explained Gifts with strings attached

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Some gifts can't be transferred between partners tax-free

A gift doesn't qualify as a PET if there are strings attached to it. For example, if you give your home to your children but continue to live there without paying the full market rent.

In these circumstances the ‘gift’ won’t work for IHT purposes.

Gifts with reservation

HMRC calls these ‘gifts with reservation’. This means they are still potentially taxable just as they would be if you still owned them.

Since 6 April 2005, schemes designed to get round the ‘gift with reservation’ rules are likely to lead to pre-owned asset tax – or POAT.

Pre-owned asset tax (POAT)

This is income tax you’ll have to pay each year on the value of the benefit you are deemed to get from the assets that fall into the POAT rules. The only way to avoid paying this tax is to reverse the scheme, or to keep it but opt to have the assets treated as a gift with reservation.

If you keep the scheme, the amount on which you pay POAT is 5% of the value of the asset, or the full commercial rental you would pay if it’s land. If this is less than £5,000 it is tax-free.

The rules also apply to any money you have given to someone within the last seven years to buy something you are benefiting from, such as a house, unless you pay full market-value rent.

Date for decision

You need to decide whether to keep the scheme by 31 January following the end of the first tax year when POAT becomes due (so 31 January 2017 if the tax first arises in 2015-2016).

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Last updated:

April 2016

Updated by:

Ian Robinson

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