Painting is a friend who makes no undue demands, excites no exhausting pursuits, keeps faithful pace with feeble steps, and holds her canvas as a screen between us and the envious eyes of Time and the surly advance of decrepitude.

Winston Churchill

The recent offer by the estate of Lady Mary Soames to transfer 38 paintings by Sir Winston Churchill into public possession to settle a tax liability under the “Acceptance in Lieu” scheme provides a timely opportunity to consider how the scheme is now functioning in parallel with the newly created Cultural Gifts Scheme.

The offer in lieu forms only one strand of the distribution of Lady’s Mary Soames’ estate.  Many of her personal papers have already been bequeathed to Churchill College, Cambridge, while other items from within Lady Mary’s estate are due to be sold at Sotheby’s on 17 December 2014. 

The Acceptance in Lieu scheme aims to keep the nation’s most important cultural objects within the UK on display to the public. The scheme was introduced by section 56 of the Finance Act 1910, which came into force on 29 April 1910. For over 100 years the scheme has, through the generosity of the Treasury, preserved the nation’s cultural fabric in a mutually beneficial way.

Offers in lieu are made to the Commissioners of HMRC, who in turn are advised by the Acceptance in Lieu Panel of the Arts Council England. Offers in lieu can only be made by those liable to pay Inheritance Tax, Capital Transfer Tax or Estate Duty – such as the Soames family. The scheme does not apply to Capital Gains Tax liabilities. Arts Council England describes the benefits of having such an offer accepted as follows:

If, in order to settle a tax liability, an estate sells an object valued at £100,000 on the open market, inheritance tax is generally payable at a rate of 40% and the estate receives £60,000. If the same object is offered in lieu, 25% of the tax that would have been payable is remitted to the estate, with the result that the object has a tax settlement value of £70,000. An object is, therefore, worth 17% more if it is offered in lieu of tax than if it is sold on the open market at the same price.

In 2013, with the aim of promoting philanthropic gifts to the nation inter vivos, the government introduced the Cultural Giving Scheme. The scheme came into force in March 2013 under Schedule 14 to the Finance Act 2012. The scheme allows individuals or companies to receive a reduction in their CGT or Income Tax liability of a percentage (20% for companies, 30% for individuals) of the agreed valuation of the object being donated. The object must be held for the benefit of the public or the nation.

The significance of the conjoined schemes is that they feed from the same budget pool, which under the AiL had been £20,000,000 but on the introduction of the CGS was raised to £30,000,000 (of the tax-agreed valuation rather than the open market value). It is fair to say that, given the fact that two schemes are now feeding from a funding source that has only been increased by one half, early consultation with those in a position to advise on both schemes is essential. Sir Winston would expect nothing less.