Which asset could help minimise IHT liabilities? Guy Abrahams, Rebecca Meade and Rebecca Welman write for International Adviser

Private Client Partner, Guy Abrahams, and Private Client Associate, Rebecca Meade, have authored an article for International Adviser on IHT liabilities.

Their article, entitled 'Which asset could help minimise IHT liabilities?', was first published in International Adviser on 23 June 2021. The full article can be read below.

UK inheritance tax (IHT) is due at a maximum rate of 40% on the value of an individual’s estate over their available IHT nil rate band, currently set at £325,000 ($448,500, €378,000).

There are ways to minimise IHT where individuals own what qualifies as a ‘national heritage asset’, which can be a picture, land, buildings, a book or manuscript, work of art or scientific object or a collection, or anything else considered pre-eminent for its national, scientific, historic or artistic interest.

An asset is pre-eminent if:

• It has an ‘especially’ close association with the UK’s history and national life;
• It is of especial artistic or art-historical interest;
• It is of especial importance for the study of a particular form of art, learning or history; and/or,
• It has an especially close association with a particular historical setting.

We expect that what amounts to a national heritage asset will change over time and as new art forms develop. It is not limited to stately homes and Old Masters. A letter written by Churchill, a Fred Sandbank sculpture and a collection of fossils are all examples of assets that have qualified.

Following the surge of investment in digital art and non-fungible tokens (NFTs), which saw the digital artist known as Beeple sell an NFT of his work for a record breaking $69m (£50m, €58m) earlier this year, it is probably only a matter of time before discussion turns to whether such works can qualify as national heritage assets.

Acceptance in lieu (AIL)

Taxpayers can transfer national heritage assets to public institutions such as museums and galleries in payment of tax. To encourage taxpayers to take advantage of the scheme, instead of selling assets and paying tax with the proceeds, there is a financial inducement, called a ‘douceur’, which is 25% of the tax payable or 10% for land.

Take, for example, an individual who dies owning a pre-eminent sculpture worth £1m. £400,000 of IHT would be due on it.

If the individual’s executors sell the sculpture on the open market and use the proceeds to pay the £400,000 of IHT, the net proceeds would be £600,000. But, if the executors use the AIL scheme, they would secure a douceur of £100,000 – 25% of the £400,000 tax – meaning they would have both paid the IHT on the sculpture and secured a £700,000 tax credit to set against the IHT on the individual’s remaining assets.

As a result, the beneficiaries end up £100,000 better off.

Assets must be offered for an AIL within two years of the relevant taxable event, which is typically a death. The Arts Council’s AIL panel then decides if an asset is pre-eminent and if they agree the value the taxpayer has given for it.

Following the panel’s recommendation, the final decision is made by the secretary of state for digital, culture, media and sport and, if accepted, the asset is allocated to a public institution.

It was recently announced that Stephen Hawking’s scientific and personal papers are the subject of an AIL. As a result, they will be on public display in various English public institutions as early as 2022.

Private treaty sale

Another way to offset some of the IT liabilities is through a private treaty sale.

This is similar to an AIL, except that a pre-eminent asset is sold to a public institution that pays the taxpayer a sum calculated on the same basis.

The price is negotiated between the taxpayer and the institution.

Using the example above, the executors would receive cash proceeds of £700,000.

Conditional exemption

If IHT becomes due on pre-eminent assets, owners can defer the tax indefinitely, provided they undertake to HMRC that they will keep the assets in the UK, preserve them, and allow “reasonable public access” to them.

What is reasonable public access has to be agreed with HMRC and will depend on the type of asset.

It could involve lending an object to a museum or gallery or, if it is to remain in situ, allowing public access for a certain number of days a year.

The exemption is conditional because a breach of the undertakings – a sale, typically – will mean the withdrawal of the exemption and the deferred tax charge falling due.

If the asset passes on death, or as a gift, the owner can renew the undertakings to avoid loss of the exemption.