In its 2019 report, Arts Council England revealed that in the past financial year, objects with an agreed value of nearly £60 million have been given to UK museums and galleries in lieu of tax. The total value of objects coming into public ownership was more than double that of the previous year.
The rich variety of items included the personal papers of Tony Benn, a Spanish flag seized after the capture of Havana in 1762 and a set of 73 portrait drawings on placemats made by Damian Hirst during breakfast meetings with his business partner Frank Dunphy at The Wolseley restaurant in London. One of Hirst's drawings – which depicts Dunphy as a boiled egg and is entitled "Frank eggs-ellent Dunphy" – is the product of a debate over how to crack open an egg. Each of these items reduced the donor's tax liability by approximately £210,000, £4,000 and £90,000, respectively.
This record-breaking year serves as a reminder that cultural items continue to enter public ownership through acceptance in lieu (AIL) and the cultural gifts scheme (CGS). Together with the conditional exemption (CE) scheme, tax reliefs for heritage property can provide significant tax saving opportunities.
AIL allows taxpayers (often executors of an estate) to transfer heritage assets to a museum, gallery or other public institution to offset an inheritance tax (IHT) liability. First introduced by David Lloyd George in 1909, it offers an inducement, known as a 'douceur', that makes it more attractive to transfer a heritage asset to an approved institution than to sell it on the open market. For example, a painting worth £200,000 would attract an IHT liability of £80,000 on death, meaning that the taxpayer would receive only £120,000 net of tax. Where AIL applies, a 25% douceur (or 10% in the case of land) is added to the IHT payable, which in this instance would be £20,000, meaning that the taxpayer would receive a credit of £140,000 net of tax.
AIL is available on:
- any collection or individual picture, book, manuscript, work of art or scientific object; or
- anything else that the secretary of state considers pre-eminent for its national, scientific, historic or artistic interest.
For an object to be 'pre-eminent', it must:
- have an especially close association with UK history or national life;
- be of especial artistic or art historical interest;
- be of especial importance for the study of some particular form of art, learning or history; or
- have an especially close association with a particular historical setting.
The above categories are broad enough to include foreign as well as British works (eg, gifts from foreign sovereigns or objects acquired abroad in circumstances closely associated with UK history). In addition to objects of national importance, AIL extends to:
- objects which are significant in a local context;
- objects which are important for a particular scientific development; and
- works of art, manuscripts, furniture or other items which have an especially close association with an important historic building.
In contrast to AIL, which is available as a saving only against IHT, the CGS is intended to give taxpayers an incentive to contribute works of art during their lifetime, providing relief from income, capital gains and corporation tax. The combined tax settled under AIL and CGS cannot exceed £40 million per year.
CE is a deferral of tax, not a complete exemption. The same pre-eminent objects test as set out above also apply for CE. Introduced in 1896, CE is available where there would otherwise have been a 'transfer of value' for IHT purposes, such as lifetime chargeable transfer or a charge on death. It is estimated that £1 billion of IHT is currently deferred using CE assets. This represents the largest tax relief in monetary terms of all the heritage reliefs.
To claim CE relief, the owner must undertake to Her Majesty's Revenue and Customs (HMRC) that they will keep the object in the United Kingdom, ensure that it is adequately preserved and allow reasonable public access. The definition of 'reasonable public access' must be agreed with HMRC and depends on the type of object, making due allowance for preservation needs.
HMRC's guidance on capital taxation and national heritage states that as a general guide, public access to the interior of a smaller building must be for at least one day a week plus bank holidays during the spring and summer months (amounting to 28 days each year). For other buildings, it might be appropriate to seek fewer days' public access (or none at all) for the interior, where, for example, the contents or decoration would suffer from excessive internal access. For larger buildings likely to attract and capable of handling larger numbers of visitors, anything up to 156 days' internal access might be more appropriate.
The exemption is conditional because a breach of the undertakings, the death of the person treated as beneficially entitled to the property or the sale or other disposal of the property will normally lead to a loss of the exemption.
It is clear from the 2019 Arts Council England report that the United Kingdom's tax policy is successfully incentivising people to transfer their heritage assets into public ownership in order to reduce tax bills. Those that own or are executors of estates including significant works of art or other heritage assets should be aware of these valuable tax saving opportunities.
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