Intergenerational living arrangements are becoming increasingly common. For the older generation, living with their children/grandchildren means help is on hand for everyday tasks and it may make sense financially for all involved as household bills and expenses can be shared.
However, there are a number of issues that need to be considered. This blog focuses on just one of these – the Pre-Owned Assets Charge (POAC).
POAC is a charge to income tax and a trap for the unwary. Indeed, many people have never even heard of it. However, ignorance is no defence as far as the taxman is concerned and fines and penalties will be payable, in addition to the tax due, if not reported.
POAC can apply in different scenarios, but the most common one we at Gaby Hardwicke have seen is as follows:
- A retiree (or a retired couple) decides that their property is too big for them on their own and they would be better off moving in with their adult child.
- It is agreed that a new property is purchased for everyone to live in, rather than move to the retiree’s property or the child’s current property. The retiree therefore sells their property and gifts their child a significant sum towards the purchase of the new property, which is bought in the child’s name. This is thought to be sensible in case the retiree loses capacity or dies. Also, it may be thought (often erroneously) to be beneficial from a care fee perspective.
- The retiree moves into the new property with their child (and perhaps the child’s family) and occupies it as their main home. They may contribute towards the household bills but they do not pay rent to their child. After all, why should they when they so generously contributed to the purchase price?
- Unbeknown to the retiree, the benefit enjoyed by the retiree by virtue of their occupation of the property is treated as taxable income. The chargeable amount is, very broadly, the market rent the retiree would have had to pay to occupy the property.
One important point is that if the benefit received is worth less than £5,000 per year (or approximately £416 per month), there will be no tax charge. Where the £5,000 limit is exceeded, the exemption is lost completely for that tax year. A couple who are both potentially vulnerable to POAC in respect of a property that they occupy jointly will have a combined £10,000 limit (or approximately £833 per month).
If the value of the gift to the child, when added to the retiree’s estate, will not cause the retiree’s estate to be liable to inheritance tax (IHT), the retiree could consider making an election that the gift will be treated as part of their estate. POAC will then not apply: a guiding principle of the legislation is that IHT and POAC should not apply to the same asset. It is too late to make an election once the retiree dies.
The law in this area is very complicated and the above is a simplification of the issues. Gaby Hardwicke can help you identify if POAC applies and advise you on what you should do next. For more information, please contact James Mountford.
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