Valuable tax savings available on the transfer of art and heritage assets

In its 2019 report, Arts Council England revealed that in the last 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 is more than double that in 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 at The Wolseley restaurant in London with his business partner Frank Dunphy. One of Hirst's drawings depicts Dunphy as a boiled egg entitled Frank eggs-ellent Dunphy, which had its origins in a debate over how to crack open an egg. Each item reduced the donor's tax liability by approximately £210,000, £4,000 and £90,000 respectively.

The record breaking year reminds us 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.

Acceptance in Lieu

Acceptance in Lieu 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 the taxpayer would only receive £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 the taxpayer would receive a credit of £140,000 net of tax.

AIL is available on land; buildings; any collection or individual picture, book, manuscript, work of art or scientific object; or anything else the Secretary of State considers pre-eminent for its national, scientific, historic, or artistic interest. For an object to be pre-eminent, it must satisfy one of the following questions:

• 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 categories above are broad enough to include foreign as well as British works (for example gifts from foreign sovereigns, or objects acquired abroad in circumstances closely associated with our history). In addition to objects of national importance, AIL will also extend 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.

The Cultural Gifts Scheme

In contrast to AIL, which is only available as a saving against IHT, the Cultural Gifts Scheme is intended to give tax payers an incentive to contribute works of art during their lifetime, providing relief from income, capital gains and corporation tax. One important point to remember is that the combined tax settled under AIL and CGS cannot exceed £40 million per annum.

Conditional Exemption

Conditional Exemption is a deferral of tax, not a complete exemption. The same pre-eminent objects test as set out above also applied for CE. Introduced in 1896, it 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 the relief, the owner must undertake to HMRC that they will keep the object in the UK, 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 the 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), but 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 be capable of handling, larger number of visitors, anything up to 156 days’ internal access might be more appropriate.

It should be remembered that 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 UK’s tax policy is successfully incentivising people to transfer their heritage assets into public ownership in order to reduce tax bills. For those that own or are executors of estates including significant works of art, or other heritage assets, it is important to be aware of these valuable tax savings opportunities.

If you have any questions in relation to the points raised in this article, or in relation to a piece of art or other cultural property, please get in touch with a member of our Heritage property and art group.

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