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The pre-owned asset charge is an income tax charge that applies when you have previously given away an asset and later benefit from it, in circumstances that escape the gifts-with-reservation rules. It imposes an annual tax cost — potentially for many years — on arrangements that were intended to remove the asset from the IHT estate.
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POAC is closely related to the gifts with reservation rules. Read our guide to gifts with reservation of benefit first to understand the underlying anti-avoidance framework.
The gifts with reservation (GWR) rules (in the Finance Act 1986) were designed to catch arrangements where donors give assets away but retain a benefit. The classic example — giving your home to your children and continuing to live there — was caught by GWR: the home stays in the estate.
In the 1990s and early 2000s, a range of more sophisticated schemes were developed to achieve a similar IHT result while technically complying with the GWR rules. Common examples included:
POAC (introduced by Finance Act 2004, Schedule 15) was designed to impose a tax cost on these arrangements, even where GWR does not apply.
POAC applies where, in a tax year, a person:
POAC does not apply if:
For land (including a house), the annual POAC charge is calculated on the rental value of the property that the person benefits from:
For chattels and intangible assets, the charge is based on the official rate of interest applied to the capital value of the asset.
Where POAC applies, the individual can elect for the GWR rules to apply instead (under Schedule 15, paragraph 21). This means:
Whether the GWR election is preferable to paying POAC depends on:
For most people with POAC-caught arrangements, the annual income tax charge is ongoing and significant — the GWR election is often preferable, particularly if the rest of the estate is modest.
The POAC charge must be reported on the self-assessment tax return. Many people with POAC-caught arrangements are unaware they are subject to the charge — particularly where the original scheme was set up many years ago by advisers who are no longer involved.
HMRC has targeted POAC-caught arrangements specifically. If you or a family member has a home-gifting or trust arrangement from the 1990s or 2000s, review whether POAC applies and take advice.
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