Taxpayers now have to cast their minds back to assets they have already disposed of, as the rules now mean these may also be liable for tax charges.
The ‘pre-owned assets’ rule, which came into effect in the 2005/06 tax year, catches anyone who has passed an asset – such as property, shares or cash – to someone else in order to escape inheritance tax, while still deriving benefit from that asset.

The most common trigger of this tax charge is likely to be when parents have passed the ownership of their home to their children, but have continued to live in it. But it could equally affect someone who has donated fine art to a family member but left it hanging on their wall, given away a holiday home where they have continued to spend summers or gifted a lump sum that has been spent on an asset that the donor uses.

The pre-owned asset charge is essentially an income tax payable on any assumed gain from assets that you previously owned and still reap benefit from. It was brought in to catch people trying to sidestep the ‘reservation of benefit’ rules, which stated that any donated assets still being used by the donor would remain part of their estate for inheritance tax.

Under the pre-owned assets rule, if you transferred your property to your child two years ago but you still live in it, then you would have to pay income tax on the market rent for that property. If you have already agreed to pay the going market rent to your child, then you would be excluded. In the case of a pre-owned painting or antique, income tax would be payable on the assumed cost of hiring that asset.

If you have a pre-owned asset, then you have three choices. You can pay market rent on that asset to the new owner. If you give away a holiday cottage, for example, and you stay there for two weeks in the summer, you would just have to pay two weeks’ rent to the new owner. Alternatively, you can declare the asset and pay income tax on the assumed rental value. For example, if a property had a rental value of £25,000 per year, a higher-rate taxpayer would face a pre-owned assets charge of £10,000 annually.

If you want to avoid extra income tax and rental charges, you could bring the asset back into your estate to be included for IHT.

Whatever you do, the conclusive point is that you cannot escape tax on any asset that you continue to use.

If you require any more information on this subject, please e-mail or contact us for more information.

Levels and bases of, and reliefs from, taxation are subject to change.
Article date: March 2007