What is the correct IHT and pre-owned assets income tax (POAT) treatment of a property in the UK purchased by a client’s daughters using money received by them from gifts perfected outside the UK? Terry Jordan answers a query for Taxation magazine.
Will a pre-owned assets tax charge arise from a transfer of cash abroad?
I have a non-domiciled client who came to live in the UK in 2013 after he retired. The purpose was that this would enable him to see his grandchildren more regularly. Both his daughters are married to UK domiciled husbands.
In 2008, the client purchased a house in London, which is owned in four equal shares by our client, his wife and the two daughters. The daughters were given cash abroad from an account in Jersey to fund the purchase of their respective shares.
Although the gifts of cash to the daughters are “excluded property” in relation to the client, my understanding is that the pre-owned assets tax (POAT) rules will still catch this arrangement.
However, I am wondering whether the client could make an election under FA 2004, Sch 15 para 21 and, if so, what the effect of such an election would be.
Query 18,470– Pops
Reply from Terry ‘Lacuna’ Jordan, BKL
Pops’ client perfected gifts of cash to his two daughters outside the UK so that, as stated, they were gifts of “excluded property” and outside the scope of inheritance tax. The daughters then used the cash to buy their shares in the London property.
As with inheritance tax, the scope of the income tax charge on pre-owned assets (POAT), which was introduced by FA 2004, s 84 and Sch 15, is determined by a person’s domicile.
Because the property is situated in the UK and the client is now UK-resident for taxation purposes, he is potentially within the scope of the charge having satisfied the “contribution” condition. Schedule 15 para 12, which deals with non-UK domiciles, does not save him from charge. The gift to the client’s wife (if one was made) would be an excluded transaction within FA 2004, Sch 15 para 10(2)(a).
The effect of an election under Sch 15 para 21 would be to treat the daughters’ shares in the property as comprised in the client’s inheritance tax “estate” and remove him from the POAT charge.
However, an election may not be necessary because the client and his family may well fall within the “sharing” provisions in FA 2004, Sch 15 para 11(5)(c), provided they all “occupy” the property. Reference could usefully be made to HMRC guidance on what, in their opinion, constitutes occupation for these purposes.
A more general point is that we are told that the client became resident in the UK after he retired, with the purpose of seeing his grandchildren more regularly.
There needs to be a foreseeable event upon the occurrence of which he will leave the UK. In the absence of such an event, there is a danger that HMRC might assert that he has the current intention to permanently remain here.
He would thereby acquire a domicile of choice in the UK and thus expose his worldwide estate to charge.