What is the Acceptance in Lieu scheme?

In an estate where Inheritance tax (IHT) is payable, it is possible for the executors to pay or part-pay that IHT liability by offering an object from the estate to the nation.

The object would need to be “pre-eminent”, which means of particular historic, artistic, scientific or local significance either individually, or collectively, or associated with a building in public ownership.  It can be land and buildings, objects associated with those buildings or objects which are pre-eminent in their own right.

What sorts of objects can qualify?

The range of objects accepted is wider than you might think.  Some items accepted in the last few years include the archive of the children’s author Shirley Hughes, and Roger Bannister’s archive and medals as well items such as original Bach manuscripts.

How does the Acceptance in Lieu process work?

Once the object has been identified as pre-eminent, the executors having done their homework to satisfy the conditions in the legislation, they need to obtain their own independent valuation.  The executor then puts together an offer to HMRC.

HMRC passes the offer to The Arts Council / Acceptance in Lieu panel.  This is a panel of independent experts which seeks specialist advice and their own valuation of the item being offered. This process usually takes approximately 6 months, but may take longer. The crucial components of the offer are an independent valuation, an explanation of why the object is considered to be pre-eminent, digital images and details of where the object can inspected, and evidence that the person offering the object has good legal title to it. The experts shall also look at the condition of the object and would need to ascertain as to whether there was any future cost for the nation as ultimately the tax payer would be paying for this in order to maintain the object.

After any negotiations, the panel having assessed the open market value of the object then advises the Secretary of State for Culture, Media and Sport on the acquisition of the object.

The ultimate approval of potential cases lies with the Minister who makes the final decision on whether to accept it or not.

Once accepted, the Minister then assigns the item to the relevant institution for public enjoyment and is kept for the nation.  The Acceptance in Lieu credit is then allocated by HMRC against the IHT in the estate.

What is the benefit of the Acceptance in Lieu scheme?

Where an object is accepted under the Acceptance in Lieu scheme the estate receives a tax benefit.  This means that the item becomes worth more to the estate than if the item was sold at public auction. The rationale behind this is to preserve items for the nation for public enjoyment for many generations to come rather than being sold onto a private collector and potentially being kept behind closed doors.

The ‘douceur’ or ‘sweetener’ to the estate is 25% of the IHT, and the benefit of this is shown in the below calculation:

Let’s say an object of pre-eminence has an agreed value of £100,000, this would then produce an inheritance tax liability of £40,000 (£100,000 @ 40%). The net value of the object to the estate would then be £60,000 (£100,000 – £40,000). You then add 25% of the IHT liability (the douceur) which in this case is £10,000 to the net value.  The estate therefore receives a total tax credit of £70,000 (£60,000 + £10,000).

The tax benefit to the estate in this example is 17% as £70,000 is 17% higher than the net value of £60,000 without the ‘douceur’ or ‘sweetener’.

In respect of land and buildings the IHT incentive is 10% as opposed 25% referred to above in respect of objects of pre-eminence.

It is also important to note that HMRC won’t give change if the object’s value is greater than the amount of the IHT chargeable.

For those who want the gift to be made during their lifetime there is an equivalent as the Cultural Gifts Scheme.  The resulting tax credit (of up to 30% in this case) can be applied towards income or capital gains tax, and can be applied over several years.

Are the savings really too good to be true?

I have recently been involved in a case relating to an archive of pre-eminence. The inheritance tax liability would have been £61,400. I ended up securing for the executors a repayment of inheritance tax to the estate of £107,450. So yes, it does work!

If you have any questions, do not hesitate to get in touch.