Pre-owned assets tax (POAT) was introduced by Schedule 15 Finance Act 2004 to impose an annual income tax charge from 6 April 2005.

For intangibles such as insurance products, two conditions have to be satisfied for the charge to apply:

1. the asset has to be subject to a settlement, and
2. that settlement needs to be one under which the settlor would generally be liable to tax on any income arising (broadly a settlor included trust).

The annual taxable benefit deemed to be retained is the value of the asset on a prescribed date (6 April) multiplied by the official rate of interest (currently 4.75%).

HM Revenue & Customs has stated that business assurance trusts, where the settlor is included, are caught by the legislation.

When valuing intangible property, the legislation requires that the market value of the asset is used. For a life policy, it follows that the health of the client must be a key factor in assessing this value. Where the client is in good health then it is likely that the value at the prescribed date would be in the region of the surrender value of the policy. If the settlor were in poor health then it is likely that the value would be nearer the sum assured. Obviously, the settlor needs to consider the potential POAT charge versus the access to the policy, for example if he/she were to leave the business.

It may be that the settlor values this flexibility higher than the potential POAT charge.

To avoid the possibility of a POAT charge, our business assurance trusts currently exclude the settlor from benefiting.

In the meantime we have provided some questions and answers which may be of assistance.

Q1. My client is a settlor of an existing Skandia business assurance trust and not excluded from benefiting from the trust. Is he/she caught by the POAT charge?

A. Yes, HM Revenue & Customs has stated that the POAT legislation will apply, as the two conditions described above are met.

Previously, it was accepted by HM Revenue & Customs in 1986 following discussions with the ABI that where a business assurance trust was part of a fully commercial arrangement the Gift With Reservation (GWR) provisions would not apply.

Q2. How will the POAT charge apply?

A. It is first necessary to determine the taxable value of the deemed benefit retained. This must be done on the valuation date by multiplying the ‘market value of the asset’ by the ‘prescribed rate of interest’.

The valuation date: 6 April each year

The market value of the asset: the ‘open market value’

The prescribed rate of interest: the official rate of interest on the valuation date (currently, 4.75%)

The formula is:

Market value of the asset X Official rate of interest = Deemed benefit

The ‘deemed benefit’ is then compared to the de minimis limit of £5,000

• If the deemed benefit is £5,000 or less no liability will arise.
• If the deemed benefit is more than £5,000 a liability will arise in respect of the whole deemed benefit (not merely the amount in excess of £5,000).
  Where a deemed benefit is taxable it is at the settlor's marginal income tax rate.

Q3. Is it possible to avoid the POAT charge?

A. Yes,

• if the de minimis limit of £5,000 is not exceeded; or
• providing the settlor is excluded from benefiting from the trust fund before 6 April of the relevant year of assessment, the POAT legislation will not apply (excluding the settlor will have no IHT implications for the settlor); or
• the settlor could elect for the GWR provisions to apply; or
• if the settlor is excluded from benefit during a year of assessment where the proportionate value of the deemed benefit retained does not exceed £5,000.

Q4. What is the market value of my client’s policy and how do I determine this?

A. The approach to valuing property for the purposes of POAT is the price that the property might reasonably be expected to fetch in the open market at that time. For a life assurance policy, one of the critical factors in assessing this value can be the health of the life assured at the valuation date. It is not clear how far HM Revenue & Customs expects taxpayers to go in determining the health of the life assured. If you are in doubt about whether a valuation will be acceptable, we suggest you contact HM Revenue & Customs helpline for further guidance.

Q5. There is a de minimis limit. Does this apply to the 'deemed benefit' or the POAT liability?

A. This applies to the 'deemed benefit', not the POAT liability. So if your client’s benefit is more than £5,000 in a tax year, then the POAT liability will arise.

Q6. My client has two policies, both with deemed benefits below the £5,000 de minimis limit: one is £3,000 and one £4,000. Does POAT apply?

A. Yes, POAT will apply. The de minimis limit is not per asset but the aggregate of all assets affected. All the benefits are added together and then tax is payable at the settlor's marginal income tax rate.

Q7. Can the settlor elect for the GWR benefit legislation to apply?

A. Yes, it is possible for the settlor to elect for the GWR rules to apply. This will ensure the POAT legislation will not apply. However, before making any such election we strongly recommend you review how the different taxes will affect your client.