Probate and inheritance - how to deal with the financial affairs of someone who has died

Probate: heritage assets - could your artwork or antiques pay the inheritance tax bill?

15 October 2019

Not many people know, but in the UK it is within the government’s remit to protect and promote the country’s cultural and artistic heritage. As a result, there are heritage tax reliefs available on death.

This means that artworks have been saved from export, or sale to private collections, and have instead found a home in national heritage institutions. The Arts Council England has revealed that pieces of art worth £58.6 million were handed over in lieu of tax in 2018-19.

So, it may well be that a piece of artwork could be used to settle some or possibly the entire inheritance tax (IHT) bill.

Acceptance in Lieu

HM Revenue & Customs has an Acceptance in Lieu (AIL) scheme which enables a taxpayer to transfer heritage assets to an approved museum or art institution in settlement of IHT liabilities.

The art, objects or collections in question must be considered of ‘pre-eminent importance’ on the basis of their national, scientific, historic or artistic interest, and in acceptable condition.

The process is:

  1. The first step is to contact HMRC where checks will be carried out to see what liability there is for tax and that the offer in lieu is being made by those persons liable for the tax.
     
  2. If the item offered meets the basic criteria of the scheme, it will be referred for scrutiny to a panel of independent experts; the Arts Council’s specialist AIL panel, who seek further advice from museum curators, scholars and members of the art trade.
     
  3. Together they determine whether or not the item is considered in pre-eminent and acceptable condition and what value it should be accepted at before making a recommendation to the Secretary of State for Culture, Media and Sport.
     
  4. The Secretary of State, who will choose a gallery for the item to be displayed in giving as many members of the public a chance to see it as possible, must then approve it before it can qualify for AIL.

Incentives

While there are some drawbacks to AIL relief (it is only available on IHT on the estate, the process is complicated and it can take some time for the application), the tax savings can be huge.

If, in order to settle an IHT liability, the estate sells artwork worth £100,000 on the open market, it would receive £60,000. The IHT that arises on the artwork would be 40% which is £40,000. Therefore, the estate would receive only 60% of the painting. 

However, through the AIL process, HMRC adds a “douceur” of 25% on the IHT payable, which in this instance would be £10,000 (25% of £40,000). This means that the estate would receive £70,000 instead of £60,000.

An object is therefore worth around 17% more if offered in lieu of tax than if it is sold on the open market at the same price.

While there are some criticisms of the scheme (namely that the tax law fails to recognise the enormous price increases to certain heritage assets in the past few decades, and the tax settled under AIL cannot exceed £40 million per annum), there is still a 17% incentive for the estate to settle the tax liability using qualifying artworks.

To put it into context, Margaret Thatcher’s family made use of the scheme and gave her archive to Churchill College, Cambridge which saw their tax bill reduced by around £1 million.

If you believe that you could be able to claim heritage relief you should seek advice as soon as possible.

Further information

For further information on the issues raised in this blog, please contact a member of our private client team.

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