Pre-owned asset rules were introduced to address inheritance tax (IHT) avoidance strategies. These rules prevent taxpayers from giving away assets before their death to avoid IHT charges, while still retaining the ability to use those assets. Such arrangements are considered "gifts with reservation," where the asset remains part of the taxpayer's estate for IHT purposes, even if they no longer legally own it.
Previously, various schemes existed to circumvent gift-with-reservation rules, allowing taxpayers to give away assets during their lifetime without incurring IHT charges while still benefiting from them. In response, the pre-owned asset rules were introduced as an extension to the gift-with-reservation provisions, aiming to close these loopholes.
When Do Pre-Owned Asset Rules Apply?
Pre-owned asset rules apply when the following conditions are met:
A taxpayer either gives away an asset or provides consideration for the acquisition of an asset.
The taxpayer continues to benefit from the asset after the gift.
The arrangement does not fall under the gift-with-reservation provisions.
The primary effect of the pre-owned asset rules is to impose an income tax charge on the former owner of the asset in relation to the benefit they receive from it.
Common Examples of Pre-Owned Asset Rules
A common scenario involves a cash gift where the recipient (the donee) receives the cash and uses it to buy an asset that the donor can still use. One of the most common assets involved in such arrangements is property. In this case, the benefit the donor receives is measured in terms of the annual rent that could be obtained if the property were rented to an unrelated third-party tenant.
Alternatively, if the donee purchases a chattel, such as a painting or antique, the notional income is calculated based on the value of the asset multiplied by HMRC's official rate of interest (which is 2.25% for the 2024/25 tax year). The chattel is valued as of the date the taxpayer first becomes liable to the income tax charge.
Reporting Pre-Owned Assets
Any notional income arising from pre-owned assets must be declared on the taxpayer’s self-assessment return. Payments made by the donor for the use of the asset may be deducted from the notional income.
If the annual pre-owned asset charge does not exceed £5,000 no income tax charge will arise.
Election to Avoid Pre-Owned Asset Charge
If an individual is subject to the pre-owned asset rules, they can elect to avoid the income tax charge. By making this election, the individual will be treated as having made a gift with reservation under IHT rules, meaning the asset will remain part of their estate for IHT purposes.
The election must be made by 31 January following the end of the tax year in which the individual first becomes liable to the pre-owned asset charge. The election applies on an asset-by-asset basis, and once made, it cannot be withdrawn.
Speak to an Expert
If you're considering gifting cash or assets to your loved ones and are unsure about the IHT implications or whether your gift could fall under the pre-owned asset rules, don't hesitate to reach out. We would be happy to assist you and ensure your gifting plans are properly structured.
Authored: London Tax Team
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