Pre owned assets tax is an income tax charge, under Schedule 15 to the Finance Act 2004, on people who keep using a home, a chattel or trust investments that they once owned or helped to pay for, where the gift with reservation rules do not catch the arrangement. The taxable benefit is a market rent for property, or interest at HMRC’s official rate on the value of chattels and intangibles, unless it is £5,000 a year or less. Instead of paying it, the person can elect on form IHT500 to have the asset treated as part of their estate for Inheritance Tax.

What is pre owned assets tax and why does it exist?

Before 2004 a range of schemes let people give away the value of their home while still living in it, by sidestepping the gift with reservation rules. Examples included lease carve outs following the Ingram case, settlements for a spouse following Eversden, reversionary leases and home loan or double trust schemes (IHTM44100 to IHTM44105). Rather than unpick each scheme, Parliament introduced a free standing income tax charge in Schedule 15 to the Finance Act 2004 (FA 2004). It applies to benefits from assets owned at any time after 17 March 1986 and first applied for the 2005 to 2006 tax year (IHTM44001).

It is commonly called a tax, but it is a charge to income tax at the person’s marginal rate on a deemed benefit. It covers three types of asset (IHTM44001):

  • homes and other real property that the person occupies;
  • chattels, meaning household and personal goods such as paintings or furniture, that the person possesses or uses;
  • intangible property, such as cash, shares and insurance bonds, held in a trust that the person set up and can still benefit from.

When does the charge apply to a home?

The charge applies if you occupy property, alone or with others, and either of two conditions is met (IHTM44003):

  • The disposal condition. You owned the property, or other assets whose sale proceeds were used to buy it, and you have disposed of all or part of your interest (IHTM44004).
  • The contribution condition. You provided, directly or indirectly, some of the money someone else used to buy it (IHTM44005). A loan does not count, because the debt stays in your estate.

Occupation is read widely. Having a key and being free to come and go can amount to occupation even with long absences, while a guest or someone making occasional visits is unlikely to be occupying. The same conditions apply to chattels, but limited or occasional use is ignored (IHTM44006).

How is the charge calculated?

Asset Chargeable amount
Home or other real property The rental value for the year, multiplied by the share of the property’s value attributable to what you gave or contributed, less any rent you are legally obliged to pay the owner (FA 2004 Sch 15 para 4)
Chattels Interest at the official rate on the value of the chattel, scaled by the same fraction, less payments you must make for its use (para 7)
Intangibles in a settlor interested trust Interest at the official rate on the value of the property, less income tax and Capital Gains Tax you already pay on it under the settlement rules (para 9)

Rental value is the rent a tenant would pay on a yearly letting where the tenant pays the usual tenant’s outgoings and the landlord bears repairs and insurance (IHTM44010). Values are taken on 6 April in the year, or the first day of the charge if later. For property and chattels a valuation then holds for five years, after which it is refreshed (IHTM44011, IHTM44017). The official rate used for chattels and intangibles is the rate at 6 April, which GOV.UK lists as 3.75% from 6 April 2026, so the charge on chattels can change from year to year even when the valuation does not (IHTM44016).

The benefit is reported in box 20, “Benefit from pre owned assets”, on the main Self Assessment tax return (SA100).

Which transactions are outside the charge?

For homes and chattels, some transactions are excluded altogether (IHTM44030 to IHTM44038):

  • a sale of your whole interest at arm’s length, or on terms that unconnected people would agree;
  • a transfer to your spouse or civil partner, or to a former spouse under a court order, including into a trust where they have an interest in possession;
  • a disposition for the maintenance of family under section 11 of the Inheritance Tax Act 1984;
  • an outright gift to an individual that is wholly covered by the annual exemption or small gifts exemption;
  • for the contribution condition, an outright gift of money made at least seven years before you first occupied the property or used the chattel.

What exemptions apply?

  • Still in your estate. No charge arises while the property, or something deriving its value from it, still counts as part of your estate for Inheritance Tax (IHTM44041).
  • Caught as a gift with reservation. If the gift with reservation rules apply, there is no charge, because Inheritance Tax will catch the asset instead (IHTM44044).
  • Non residence. No charge in a tax year in which you are not UK resident. If you are resident but not a long term UK resident, only UK assets are caught (IHTM44053, IHTM44054).
  • De minimis. No charge if the total of the rental values and notional interest for the year is £5,000 or less. This is a threshold, not an allowance: if the total is over £5,000, all of it is taxed. The test uses the amount before deducting any rent you pay, and each person has their own £5,000 (IHTM44056).

How does the election into Inheritance Tax work?

A person who would otherwise pay the charge can elect that the asset is instead treated as property subject to a reservation for Inheritance Tax (IHTM44070). The practical points are:

  • Form. The election is made on form IHT500, prescribed by SI 2007/3000 (IHTM44074).
  • Deadline. It must be made by 31 January in the tax year following the first year in which you are chargeable. If you first became chargeable in 2026 to 2027, the deadline is 31 January 2028 (IHTM44075).
  • Below de minimis. You can only elect once you are actually chargeable, so no time limit runs while the benefit is £5,000 or less (IHTM44071).
  • Withdrawal. An election can be withdrawn or amended on or before the filing date, but not after (IHTM44076).
  • Late elections. HMRC may accept a late election where events beyond your control prevented it or you could not reasonably have known you were liable, but not where you were waiting to see which option worked out better (IHTM44077).
  • Individual. Each spouse or civil partner must elect separately, and personal representatives cannot elect after death (IHTM44070, IHTM44075).

Once made, the election brings the gift with reservation rules into play. The asset is taxed as part of your estate if you are still using it at death, at the Inheritance Tax rate of 40% on value above the nil rate band, or a seven year clock starts when you stop using it.

A worked example

Illustration only. In 2023 Joan gave her son £200,000, which he used to buy a flat in his own name. On 6 April 2026 Joan moved in, paying no rent. Her gift was outright cash, so the gift with reservation rules do not apply, but the contribution condition is met and the gift was less than seven years before she moved in. The flat is worth £200,000, all attributable to Joan’s money, and its rental value is £12,000 a year. That is over £5,000, so Joan must include £12,000 as pre owned assets income on her 2026 to 2027 tax return. As a higher rate taxpayer she would pay £4,800 a year. Alternatively she can elect by 31 January 2028, in which case the flat is treated as part of her estate while she lives there.

How do you choose between paying and electing?

Paying the charge keeps the asset out of the estate, at an annual income tax cost that continues while the benefit lasts. Electing removes the income tax cost but exposes the full value to Inheritance Tax. The choice depends on life expectancy, the size of the estate, the value of the asset compared with its rental value, and whether paying a full market rent would avoid both charges. The calculation has to be made before the deadline, because HMRC will not accept a late election made simply to wait and see. For gifts of a family home more generally, see gifting property to children.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.