Inheritance Tax & Heritage Assets

I recently visited an interactive exhibition at our local library based on Judith Kerr’s classic book The Tiger Who Came to Tea.  It was whilst looking at some unfinished draft sketches of the eponymous Tiger that I took a moment to appreciate how remarkable it is that so much of the collection was not only intact, but available for public enjoyment.

It would be easy to take access to this, and many other collections, for granted, but it is not a happy coincidence that we are in such a fortunate position. Financial reality is such that landowners, collectors and creators, nor their heirs, cannot be expected to maintain assets and collections, nor make them available to us, purely out of largesse.

One of the fascinating aspects of our work is how it offers a window into a niche area of tax law and public policy, which aims to enrich society and ultimately enables exhibitions like the one that recently came to our local library.  This article looks at two schemes relating to heritage assets:

Conditional Exemption Tax Incentive Scheme

The Conditional Exemption Tax Incentive Scheme offers Inheritance Tax and Capital Gains Tax relief in respect of certain buildings, land, works of art and other objects when they pass to a new owner, either on death or by way of lifetime gift.

In order to potentially qualify for the relief, an asset must be a ‘national heritage asset’ within one of the following categories:

• Buildings, estates or parklands of outstanding historical or architectural interest
• Land of outstanding natural beauty and spectacular views
• Land of outstanding scientific interest including special areas for the conservation of wildlife, plants and trees
• Objects with national scientific, historic or artistic interest, either in their own right or due to a connection with historical buildings.

It is not always clear whether an asset will meet the necessary criteria and advice will need to be sought from one or more of the government’s heritage advisory agencies.  If there is uncertainty, a preliminary query can be made to HMRC.

Simply identifying a qualifying asset is not sufficient, however, and the new owner must enter into a binding agreement with HMRC to do three things.  These are referred to as “undertakings” by which the new owner must:

• Look after the asset
• Make it available for the general public to view
• Keep it in the UK.

Whilst the requirements to look after the asset and keep it in the UK are self-explanatory, the terms on which it must be made available to the public will depend on the nature of the asset and what is reasonable in the circumstances, and will need to be agreed by HMRC.  A new owner applying for Conditional Exemption should set out their proposals in their Heritage Management Plan.  HMRC will normally expect a heritage building to be available for public viewing at least three months per year, but if unrestricted public access could cause damage or interfere, for example, with the farming calendar or local wildlife, there is scope for this to be negotiated. For objects, it may be necessary to arrange access by appointment at certain times.

Once the undertakings are agreed with HMRC, the heritage asset will be exempt from Inheritance Tax and Capital Gains Tax relief for as long as the new owner abides by them.

Should the new owner stop complying with one or more of the undertakings, however, this failure will become a chargeable event for tax purposes and tax will be payable immediately should there be a breach of the undertakings ‘in any material respect’.  This qualification allows owners a reasonable time to rectify any specific breach, which reflects HMRC’s understanding that, for example, that it will take much longer to restore part of an historic building than it will to reopen a gate to allow visitors access again.

Acceptance in Lieu Scheme

The Acceptance in Lieu Scheme also offers Inheritance Tax relief in respect of certain buildings, land, works of art and other objects, with the focus being on pre-eminence.  This relief is also potentially available whenever a charge to Inheritance Tax arises, either on death or the making of a lifetime gift, but it differs to the Conditional Exemption Tax Incentive Scheme in that ownership of the asset in question must be given up.

The following can potentially qualify for the relief:

• Any land or buildings as agreed with HMRC
• Any objects which are or have been kept in a particular building:
  1. Which HMRC has accepted in satisfaction of IHT
  2. Which belongs to the Crown, Duchy of Lancaster, Duchy of Cornwall or a Government department
  3. Which is under the guardianship of the Secretary of State for Culture, Media and Sport or the Department of Finance for Northern Ireland
  4. Which belongs to one of the museums, galleries, libraries and other institutions listed in Schedule 3 of the Inheritance Tax Act 1984.

and it is desirable for such objects to remain associated with the building

• Any picture, print, book, manuscript, work of art, scientific object or other thing which the Secretary of State is satisfied is pre-eminent for its national, scientific, historic or artistic interest
• Any collection or group of pictures, prints, books, manuscripts, works of art, scientific objects or other things if the Secretary of State is satisfied that the collection or group, taken as a whole, is pre-eminent for its national, scientific, historic or artistic interest.

In assessing whether land and buildings are eligible for the relief and pre-eminence, HMRC will defer to the Valuation Office Agency.  For works of art and other valuable objects, the agreement of Arts Council England will be required.

The criteria for pre-eminence are:

• That the object has an especially close association with our history and national life
• That it is of especial artistic or art-historical interest
• That it is of especial importance for the study of some particular branch of art, learning or history
• That it has an especially close association with a particular historic setting.

It is important to seek preliminary advice about pre-eminence, prior to submitting an offer under the scheme.

Once an asset has been accepted as qualifying for the relief, HMRC will accept the asset’s net value in lieu of the estate’s Inheritance Tax liability, plus a douceur of either 10% (for land) or 25% (for objects) of the tax which would otherwise have been payable.  The purpose of the douceur is to ensure that the estate is better off financially by donating the asset, to encourage charitable giving.

For example, a work of art with a value of £10,000,000 would normally incur Inheritance Tax of £4,000,000, meaning its net value would be £6,000,000.  HMRC would add a douceur of £1,000,000 (25% of £4,000,000) to the net value and accept the combined £7,000,000 as a payment in lieu of tax.

Conclusion

For those lucky enough to own an asset either of value to our national heritage or of pre-eminence in its field, these schemes offer options to assist them with the ever increasing complexities of estate and asset management.  To the rest of us, they allow us access to sights, experiences and knowledge which would otherwise be hidden behind private ownership or in private collections.

If you have any questions about the topics raised in this article, our Probate team would be happy to help.