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The Art of Successful Inheritance Tax Planning

Benjamin Franklin said there were only two things certain in life: death and taxes.   

No one can avoid the former, but you can minimise the latter creatively, particularly if you own items of artistic, or social or heritage interest to the British nation and are willing to give them to the nation. 

Generally, there are two schemes which could be of interest to you – Acceptance in Lieu and the Cultural Gifts Scheme. 

Acceptance in lieu

Acceptance in Lieu (AIL) has been securing cultural objects for the nation as a tax incentive scheme for over a century. The scheme is administered by Arts Council England and gives people an opportunity to offset their inheritance tax (IHT) or estate duty bill by offering distinguished work of art to a public collection in lieu of payment.

For example, the papers of Margaret Thatcher were donated to the Margaret Thatcher Archive Trust. She was the longest serving holder of the office in the 20th century and the first woman to take up the position. This memoir gives profound insight into her handling of the war and her emotional reaction to events provides a different perspective to ‘the Iron Lady’. The donation saved the donor over £1m in IHT.

Other high profile examples include paintings by Sir Edwin Landseer (£192,000), John Constable (£1,000,000), a collection by Sir Winston Churchill (£9,180,000) and William Holman Hunt (£1,750,000). A donation of land is also accepted in lieu of IHT. 50 hectares of ecologically unique woodland in North Norfolk was donated to the national trust, saving the donor £118,000 in IHT.

Cultural gifts scheme

The Cultural Gifts scheme (CGS) is the most recent form of tax relief for heritage assets. The scheme provides that if an owner of an heritage asset is willing to offer that asset for the benefit of the public or the nation, and that asset is assessed to be “pre-eminent”, the owner will be entitled to a reduction in his income tax or CGT liability for the tax year of the gift (and up to four subsequent tax years) of 30% of the value of the asset.

By way of example, a collection of 40 Italian photographs contains rare early examples of Italian photography is rare and important to the representation of the history of Italian photography. No institution in Italy or elsewhere possesses a collection of equal remit or depth. The collection was donated to Tate, saving the tax payer £83,000.

Joan Eardsley RSA painted scenes from Townhead, an area of great deprivation but with a vibrant and colourful local community. The work serves as an important historic social record of a vanishing world due to major redevelopment in the area, and the donation of ‘Seated boy’ saved the donor £3,500 IHT.

Benefits all round

For the taxpayer, the benefit is clear.  Because tax would have to be paid on an object sold privately, items are generally worth 17% more if offered in lieu of tax than if sold on the open market at the same price. The tax payer gets a reduction to the amount of tax payable on the estate and the object accepted is not brought into account in calculating the taxable estate. It may also be possible to keep the asset by offering public access.

For the institutions, this is one of the most important means of the national institution acquiring significant art, cultural and heritage objects. Acquisitions come at no cost to the institution, except where the object’s value exceeds the tax liability owed.

For the general public, they have access to the items of interest. 

How the schemes work

Any individual with IHT liabilities in the UK can offer an object through AIL/CGS. The taxpayer is given the full open market value, which is then allocated to a public museum, archive or library. Allocations are decided on a case-by-case basis by a panel and must be approved by the culture secretary or minister for each UK nation.

Objects must be offered to HMRC and are then passed to the panel to be assessed for their eligibility and value under a defined set of criteria. Items can be judged to be pre-eminent on a local and regional level as well as in a national or international context.

The pre-eminence criteria are:

  • 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 historic setting?
  • The panel will look at valuation and agree on a market price fair to both the vendor and the nation.

Offers often come through solicitors or auction houses.

People may settle their IHT liabilities through these schemes while still alive, giving a much greater guarantee against objects being sold off privately after death.

Cultural gifts schemes and acceptance in lieu report 2015

The 2014/15 annual report shows that 29 cases, including a wide range of works of art worth almost £40 million, were accepted. Most of these gifts were donated during the donor’s lifetime.

For advice on cultural gifts or payments in lieu, please contact either Helen Freely or Roy Campbell.

This briefing was posted on 13 January 2016.

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