Stephen Hawking’s wheelchair, a pair of his glasses,
scientific bets signed with a thumbprint, papers on theoretical
physics and even his scripts from The Simpsons are amongst the
items that have been acquired by Cambridge
University Library and the Science Museum Group in lieu of
approximately £4.2 million of inheritance tax (IHT). The
items were acquired under the IHT ‘Acceptance in Lieu’
scheme (‘AIL’), which provides a means for private property
to come into public ownership at no direct cost to the receiving
institution, which becomes the new owner.
The AIL scheme enables taxpayers to transfer objects of
significant cultural,
scientific or historic heritage to the nation to offset an IHT
liability. Objects
offered under the AIL scheme must be pre-eminent and in acceptable
condition. Pre-eminence is determined by national, scientific,
historic or artistic interest.
Offers in lieu are submitted to HM Revenue and Customs, and
assessed by the Acceptance in Lieu Panel (AILP) of the Arts Council
before being approved by the Secretary of State for Culture, Media
and Sport.
The scheme is beneficial for the taxpayer, because of an
inducement known as a douceur, in which 25 per cent of the tax that
would have been payable on the object is remitted to the estate of
the deceased. By way of example, if an object worth £100,000
is offered in satisfaction of an inheritance tax liability, its net
open market value would be £60,000, after the deduction of
£40,000 in settlement of IHT (IHT being charged at 40 per
cent).
A douceur of £10,000 (25 per cent of £40,000) would
be added to this value,
meaning that the object has a tax settlement value of £70,000
– a 17 per cent
higher value than if the object were sold on the open market and
the IHT paid. The incentive makes it more attractive for a taxpayer
(often executors of an estate) to transfer an accepted object
rather than selling through auction with all the associated
costs.
The AIL scheme can be of great benefit when settling inheritance
tax,
particularly in estates with high tax liabilities and where the
beneficiaries are reluctant to assume responsibility for the
security, insurance and maintenance of objects that may be offered
in lieu of tax. The AIL scheme is also a great way of ensuring that
items of considerable historical value do not vanish from public
view but are instead acquired for the nation.
Whilst AIL is relevant on death, there are also schemes that can
be used in an individual’s lifetime such as the Cultural Gifts
Scheme (‘the Scheme’). The forms of tax liability that can
benefit from a reduction under the scheme are income tax, capital
gains tax and corporation tax.
Applications under the scheme can be made in respect of works of
art, heritage objects, manuscripts and archives, scientific objects
and objects kept in and associated with significant buildings. As
with the AIL scheme, the AILP consider applications and if the
panel is satisfied that the requirements of the scheme have been
met, it will make a recommendation to the Secretary of State for
Culture, Media and Sport. First and foremost, the object offered
must be preeminent and the panel use four criteria (these criteria
are also used when assessments are carried out under the AIL
scheme) when assessing offers:
- Does the object have an especially close association with our
history and national life? - Is the object of especial artistic or art-historical
interest? - Is the object of especial importance for the study of some
particular form of art, learning or history? - Does the object have an especially close association with a
particular historical setting?
The object does not need to satisfy all four criteria and other
factors will also be taken into account by the panel. The object
will then be valued on open market rates and, in the case of an
individual, 30 per cent of the agreed value of the object is then
available to offset against an income tax or capital gain tax
liability. Where the value of the 30 per cent exceeds the tax
liability, the individual has the option of spreading the tax
reduction received over a five year period beginning with the year
in which the offer is registered.
The scheme, which is primarily philanthropic with a tax benefit,
has resulted in an assortment of objects being gifted to the
nation. This ranges from The Great Seal of Queen Victoria, John
Constable’s “Stratford Mill”, and a 2000-year-old
iron-age fire guard that was discovered in a peat bog in 1892 to
more recently a letter from Sir Winston Churchill to his old army
friend, Hugo Baring.
If the owner of a work of art, outstanding land and buildings
and other objects that are pre-eminent for their national,
scientific, historic or artistic interest, or are historically
associated with an outstanding building wishes to defer IHT, either
on death or on a chargeable lifetime gift, the Conditional
Exemption regime could also be helpful. For HMRC to consider that
works are eligible, they should be pre-eminent or part of a
collection or group of relevant objects which, taken as a whole,
appear to be pre-eminent. The regime operates as a deferral of tax
(not a complete exemption).
If an object is accepted, the owner must undertake: (a) to keep
the work of art permanently in the UK and not to remove it
temporarily except for an approved purpose and period, (b) to take
agreed steps to preserve it, and (c) to secure reasonable public
access to it. There must also be some form of open access, which
will usually be in the form of the owner’s house being open to
the public for an agreed period of time. Access could also be
provided by a loan of the work to a local gallery or museum for
example. HMRC will monitor the undertaking by writing to owners
every five years for confirmation that all the conditionally exempt
chattels are still present. If there has been a material breach of
an undertaking, a chargeable event will have taken place and this
will give rise to an IHT and/or CGT liability. Other chargeable
events would include a sale of the object or death.
Under the schemes discussed above, there are valuable tax-saving
opportunities that executors and owners of suitable works should be
aware of and, where appropriate, take advantage of. The Arts
Council England Annual Report and Accounts 2020 Report shows that
52 cases – spanning works of art and other cultural objects
worth nearly £65 million – were transferred to the
nation in satisfaction of a liability to tax.
This article was first published by Wealth
Briefing on 24 June 2021.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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