Pre-Owned Assets Print

This legislation is designed to counter the arrangements individuals had been entering into in an attempt to avoid IHT, primarily on their homes, whilst continuing to occupy the property. An income tax charge arises where arrangements have been entered into on or after 17 March 1986. This was the date on which the anti-avoidance provisions relating to gifts with reservation were implemented, and any transfer of assets where the transferor subsequently benefits from those assets may be caught by this legislation, although for cash gifts there is a 7-year time limit, which is discussed below.

There are three categories of asset for the purpose of this legislation, being:

  • Land (and buildings), including an interest in land;
  • Chattels; and
  • Intangible assets.

The rules regarding these categories are all slightly different from each other, although there remains the same outcome, being an income tax charge on the transferor.

Subject to any exclusion or exemption, an income tax charge arises where an individual (“the transferor”) occupies land, which at any time after 17 March 1986:

  • He had owned an interest in; or
  • He had owned an interest in other property, the proceeds of the disposal of which were applied by another person towards the acquisition of an interest in the relevant land; and
  • The transferor has disposed of all, or part of his interest in the relevant land, otherwise than by an excluded transaction.

These are known as the disposal conditions.

In addition, the income tax charge will arise where the transferor occupies land where, subject to any exclusion:

  • The transferor has directly or indirectly provided, otherwise than by an excluded transaction, any of the consideration given by another person for the acquisition of:
    • An interest in the relevant land; or
    • An interest in any other property, the proceeds of the disposal of which were, directly or indirectly applied by another person towards the acquisition of an interest in the relevant land.

These are known as the contribution conditions.

The following transactions are excluded from the effects of this legislation:

  • The disposal of the transferor’s entire interest in a property, except for any right he expressly reserves over the property, and the disposal is either:
    • By a transaction at arm’s length to an unconnected third party; or
    • By a transaction with a connected person which is made on the same basis as would be expected of a transaction at arm’s length to an unconnected person.
  • This exclusion only applies to the disposal condition, and does not exclude the contribution conditions from applying.
  • Property transferred to the transferor’s spouse, or in the case of a transfer ordered by a court, former spouse.
  • Property transferred as a gift, or under a court order for the benefit of a former spouse, and the property becomes settled property in which the donor’s spouse, or former spouse is beneficially entitled to an interest in possession.
  • The transfer is exempt from IHT where it is expenditure incurred for the maintenance of the transferor’s family. This includes payment by one party to a marriage:
    • For the maintenance of the other party; or
    • For the maintenance, education or training of a child of either party (or an illegitimate child of the donor) up to 5 April of the fiscal year during which the child becomes 18, or if later when the child ceases full time education or training; or
    • For the reasonable provision for the care or maintenance of a relative of the donor, or spouse who is:
      • Incapacitated by old age or infirmity from maintaining himself;
      • The widowed, separated or divorced mother or mother-in-law;
      • The donor’s unmarried mother if she is genuinely financially dependent upon the donor.
  • Property transferred as an outright gift which falls within either:
    • The IHT annual exemption (£3,000)
    • The IHT small gifts exemption (£250)
  • The outright gift of money, in any currency, by the donor made at least 7 years before the donor first occupies the land, or has the use of the chattels.

Where an asset remains within the estate of the donor for IHT purposes, the transaction is exempt from the income tax charge. The most common situation where an individual has disposed of an asset but it remains in his estate is where he has settled the asset into a trust in which he has an interest in possession, commonly referred to as a life interest.

The exemption also applies where an asset is caught by the gift with reservation rules. This would normally apply where an individual has gifted all, or a part of his house to say his children, but he continues to occupy the house to the exclusion of the children.

It is worth mentioning that a specific exemption exists which prevents the gift with reservation rules applying in the situation where an individual transfers a share of his residence to another individual who also resides in the property. For the exemption to apply, the donee must continue to reside in the property, and the donor must pay not less than his proportionate share of the running costs of the property. This was originally enacted to exempt the transfer from otherwise falling within the gift with reservation rules, but this legislation also exempts such transfers from the pre-owned asset tax charge.

There is a de-minimis exemption where the aggregate of all chargeable amounts under these provisions is not more than £5,000, when an income tax charge does not arise for the year. However, should the chargeable amount exceed £5,000, then the whole amount becomes taxable. The first £5,000 is not then exempt from the charge.

An individual who is not domiciled in the UK is also exempt from these provisions in so far as the property is situated outside the UK.

Where the donor pays the owner full market rent for the occupation of the land, or use of chattels, the rent paid is deducted from the annual rental value in determining the tax charge. There are certain restrictions to this deduction, which must be made under a legal obligation to be deductible. It must also be paid during the fiscal year in which the occupation or use takes place. Payments which are made other than under a legal obligation or in a year other than the year of charge are disregarded.

The quantum of the tax charge is dependent on the type of asset involved. For land, the charge is based on the annual rental value of the property. This is defined as the rent which would have been payable for the period if the property had been let to the chargeable person at an annual rent equal to the annual value. Annual value is the rent reasonably obtainable on a yearly tenancy on the basis that the landlord repairs and insures the property. This may give rise to a slightly higher valuation than is normal. This is apportioned to relate to the part of the rental value which is attributable to the part of the land that represents the original disposal, or contribution.


  1. In December 2014 Heather gave her son Simon a cash gift of £400,000. Simon used the cash to buy a house in which he lives. In 2020 Simon is sent to work overseas by his company, and he asks his mother to house-sit for him whilst he is away. She moves into the property in September 2021. As Heather has commenced to occupy the property within 7 years of making the gift, the contribution condition is met, and a tax charge arises on

If Heather does not move into the house until January 2022 there would not be a pre-owned asset charge as the contribution condition would not be met because she would have commenced occupation more than 7 years after making the cash gift to Simon.

  1. In March 1996 John, a widower, gave his son Peter shares in the family company worth £50,000. In April 2016 Peter sold the shares for £900,000, and bought a house with the In April 2020, due to his ill health, John moved into the house to live with Peter and his family. As the gift from John to Peter was not a cash gift, the 7 year time limit does not apply, so the contribution conditions are met. John would be taxed on the whole of the rental value.

If instead, Peter had sold his existing house for say £500,000 and purchased a house for £1,000,000 using the £500,000 sale proceeds of his house, and the balance from the sale of the shares, then the income tax charge on John would be restricted to the rental value x £500,000/£1,000,000.

  1. In August 2015 Anne gave her daughter Jessica a cash gift of £250,000. Jessica used the gift to build an extension to her existing house, and in January 2020 Anne moved into the house with her In this case, although occupation has commenced within 7 years of Anne making the gift to Jessica, a tax charge does not arise because Jessica did not use the cash to acquire an interest in land, but to improve her existing property.


4. In March 2021 Dorothy, who is an elderly widow, decides to raise some money to supplement her small income. She enters into an equity release scheme whereby she sells part of her house to a commercial lender, and retains the right to continue occupying the house for her lifetime. The only reason for the transaction is to raise some much-needed cash. In this case, Dorothy should not be liable to the POA charge on the basis that part disposals of land or chattels at arm’s length are exempt.

For chattels, the tax charge is also based on a notional interest charge, less any amount paid by the donor under a legally binding agreement. The notional interest is charged at the same rate as the official rate of interest, which is 2.25% for 2020/21, and 2.00% for 2021/22.

The notional interest rate is probably higher than the true rental value of chattels, and the charge is designed to deter individuals from entering into this type of arrangement.


5. In March 2002 Donald gave his son, James, a painting worth £100,000. The painting was sold in May 2016 for £3,000,000 and James used £850,000 of the proceeds to buy a yacht. Donald charters the yacht for 3 weeks every year, and pays the full market In March 2021 Donald pays for the charter which will commence on 10th April of that year. Donald will be liable to tax on the full notional interest charge for the year 2021/22 because payment was not made during the relevant year.

Where an income tax charge arises in respect of the occupation of land, or the use of chattels, and a benefit in kind also arises under the employment code, then the employment code takes precedence, and the POA charge is restricted to any excess taxable by virtue of this legislation, so that a double tax charge does not arise.

The charge on intangible assets is again based on notional interest, and arises where the donor is liable to tax on the income arising on a settlement in which he is the settlor, but excluding any settlement which remains within his estate for IHT purposes. A settlement which could be caught by this legislation is a discretionary settlement of which the settlor is a beneficiary, but does not have a life interest. Where a settlor, or his spouse, is not specifically excluded from benefiting from the trust, he is already taxable on the income of the settlement. In addition to this he will now also be charged income tax based on notional interest chargeable on the value of the settlement. As mentioned above this notional interest has been at the rate of 2.25% per annum since 6 April 2020.

For these purposes, intangible assets are any property not within the definition of land, or chattels, and include cash either in Sterling, or a foreign currency, bank deposits, and insurance policies. Where the intangible assets are income producing, such as bank deposits, the settlor will be taxed twice. Firstly on the income as it arises, and secondly on the notional interest charge. It could be expected that the tax charge would be limited to the higher of the two amounts, but this is not the case. Instead, the notional interest charge is reduced by the amount of tax paid by the settlor on the income arising, and he is then taxed on the balance.


  1. Trevor is the settlor of a settlement in which he has a discretionary interest. The only asset is a cash deposit of £500,000 on which interest of 0.2% is earned during 2021/22. His tax position for 2021/22, assuming that he is a 45% taxpayer is as follows:
 £ £
Bank interest receivable 1,000
Tax thereon @ 45% 450 450
Notional interest charge (£500,000 @ 2%) 10,000
Less tax paid on income 450
Tax thereon @ 45% 4,297 4,297
Total tax payable 4,747


In the example above, as a result of the low interest rates currently being paid, the tax charge exceeds the gross interest received during the year.

There are transitional provisions whereby an individual may elect to treat any chargeable assets as outlined above as if they were gifts with reservation for the purposes of this legislation. This treatment brings the asset back within the charge to IHT on the death of the individual and excludes the asset from the income tax charge. The election must be made by 31 January following the end of the year in which the first charge under this code applies. Accordingly, for taxpayers caught by this legislation for the first time during the year ending 5 April 2022, an election must be made by 31 January 2023. The election then takes effect for all years during which the individual continues to occupy the property or has the use of the asset. It will be necessary to carefully weigh up these options, as depending upon the individual’s circumstances either course of action may be the more beneficial, and professional advice should be sought at the earliest opportunity.

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