Pre-Owned Assets Tax (POAT)

Give a home to your children but carry on living in it, and you will normally find the house counts as part of your estate under the gift with reservation of benefit rules. That is the rule everyone knows. Less well known is what happens when the gift is structured to slip past those rules: an annual income tax charge called Pre-Owned Assets Tax (POAT) can apply instead. POAT was introduced in April 2005 precisely to close that gap, and it catches arrangements that leave the donor benefiting from an asset without the inheritance tax consequences of a reservation.

What POAT Is

POAT is a charge to income tax, not inheritance tax. It applies where someone has given away an asset, or transferred it into a trust, and continues to benefit from it, in circumstances where the gift with reservation rules do not apply. The charge is based on the value of the benefit retained each year, and it can recur indefinitely.

Because POAT is an income tax, it is declared through the donor’s Self Assessment tax return and is charged at their income tax rates.

When POAT Applies

POAT covers three broad categories of asset:

• Land and buildings, including residential property
• Chattels, such as vehicles, boats, artwork and antiques
• Intangible assets, such as shares and investments, where they were given away through certain arrangements

The typical trigger is a parent who gives their home to a child but continues to live in it, where the structure of the gift falls outside the gift with reservation rules. The classic example is the gift of cash: a parent gives their child money, the child buys a home, and the parent moves in. The gift was of cash, not the house, so there is no reservation of benefit in the house itself. But the parent has arranged a benefit for themselves from an asset derived from their own money, and POAT applies to the value of living there.

How the Charge Is Calculated

The charge is the value of the benefit the donor enjoys each year:

• Land and buildings: the open-market rental value of the property
• Chattels: broadly 5% of the capital value of the asset per year
• Intangible assets: a notional benefit calculated by reference to the official rate of interest

If the annual benefit is below £5,000, no POAT charge arises for that year. The £5,000 de minimis rule means that lower-value arrangements, such as a small share of a modest home, often fall outside the charge entirely.

The POAT Election

A person caught by POAT can elect to have the asset treated as part of their estate for inheritance tax purposes instead. The election is irrevocable, and it replaces the annual income tax charge with a potential inheritance tax liability on death.

Which option is better depends on the circumstances:

• An older donor with a shorter life expectancy may prefer the election, accepting one inheritance tax charge on death rather than years of income tax
• A younger donor may prefer to pay the annual POAT charge and keep the asset outside their estate

The election requires careful thought, because it cannot be undone. It is made by notifying HMRC, and it can be made in respect of some assets and not others.

POAT and the Residential Nil-Rate Band

There is a useful interaction with the inheritance tax system. A donor who makes the POAT election to keep a home in their estate, rather than pay annual charges, keeps the home available for the residence nil-rate band if it passes to direct descendants on death. For a home that would otherwise fall outside the estate entirely, this can be a meaningful consideration when deciding whether to elect.

What POAT Does Not Apply To

Several situations fall outside POAT:

• Gifts between spouses and civil partners
• Assets the donor never owned (for example, where the donee bought the asset entirely with their own funds)
• Arrangements where the benefit is genuinely commercial, such as a full market rent being paid
• Benefits below the £5,000 annual threshold
• Certain historical transfers within the excluded transactions in the legislation

Practical Steps

• Know what you are signing. If you plan to gift a home or other valuable asset but continue to use it, assume POAT is in play unless a professional confirms otherwise. Our guide to gifts with reservation of benefit covers the parallel rules.
• Keep records. POAT benefits are valued annually, so records of rent-equivalent values, chattel values and interest calculations matter.
• Declare it. POAT is reported on the donor’s Self Assessment return. Failing to declare it is a tax disclosure issue, not an administrative nicety.
• Weigh the election. The decision between annual income tax and the one-off inheritance tax election is exactly the sort of calculation that justifies professional advice, because the election is irreversible.

POAT is an anti-avoidance measure with sharp edges, and the arrangements it catches are often set up in good faith by families trying to do the right thing. Before you gift an asset you still want to use, take advice on how both POAT and the reservation rules will treat it.

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