Avoiding the charge

There are a number of options for avoiding the charge where it would otherwise apply.

• Consider dismantling the scheme or arrangement. However this may not always be possible and even where it is, the costs of doing so may be prohibitively high.
• Ensure a full market rent is paid for occupation of the property - not always an attractive option.
• Elect to treat the property as part of the IHT estate.

The election
The effect of the election using example 4 above is that the annual £20,000 income tax charge will be avoided but instead the £1 million property is effectively treated as part of the IHT estate and could give rise to an IHT liability of £400,000 for the donee one day. Whether or not the election should be made will depend on personal circumstances but the following will act as a guide.

Reasons for making the election

• Where the asset qualifies for business or agricultural property reliefs for IHT.
• Where the value of the asset is within the IHT nil rate band even when added to other assets in the estate.
• Where the asset’s original owner is young and healthy.

Reasons not to make the election

• The life expectancy of the donor is short due to age or illness and the income tax charge for a relatively short period of time will be substantially less than the IHT charge.
• The amount of the POA charge is below the £5,000 de minimis.
• The donor does not want to pass the IHT burden to the donee.

The election must be made by 31 January in the year following that in which the charge would first apply. In other words if it would apply for 2005/06 the election must be made by 31 January 2007.