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Art in lieu of tax
A scheme that accepts art and cultural artefacts has quietly allowed a large number of pre-eminent pieces to go on public display, writes Richard Crump
Imagine receiving an inheritance tax bill from HMRC in the post. It’s a large amount, and while you could pay it in the usual way, your eyes drift to the classic Thomas Gainsborough landscape hanging on the wall. That, it turns out, could completely, or partially, clear your liability and do substantial public good in the process.
The estate of property developer Cecil Lewis recently found itself in a similar position. It gifted a rare Italian Renaissance bronze masterpiece to the United Kingdom to offset a £10.5m inheritance tax bill, highlighting the value of the Acceptance in Lieu (AiL) scheme in high net worth (HNW) estate planning.
The artwork, a 16th-century statue of Apollo Belvedere by Pier Jacopo Alari Bonacolsi, is thought to be one of the most valuable single items donated under the Art Council’s AiL scheme, which allows works of art to be gifted to the nation in lieu of inheritance tax, or other forms of tax such as capital gains or VAT.
The scheme allows an inheritance tax liability that arises on death to be settled by donating important works of art, historic objects or land of significant cultural value to the UK. In the past decade, it has brought £479m worth of artworks and other objects into public ownership.
Offers in lieu are made to HMRC. If your offer meets the basic criteria of the scheme HMRC will refer it to the AiL Panel of the Arts Council, which recommends whether the object is pre-eminent, in acceptable physical condition and the value it should be accepted at.
To qualify, objects or collections must be considered as being a ‘national heritage asset’ or pre-eminent on the grounds of their national, scientific, historic or artistic interest, or be associated with an important historic building in public ownership or belonging to certain charities such as the National Trust.
What’s in it for the owner?
The AiL scheme is attractive to executors and trustees because the estate can receive the open market value of the item, from which the tax is deducted, plus a financial incentive, known as a ‘doucer’, of 25% of the tax that would normally have been due, or 10% in the case of land and buildings.
For example, if, to settle a tax liability, an estate sells an object valued at £100,000 on the open market, inheritance tax is generally payable at a rate of 40% and the estate receives £60,000. If the same object is offered in lieu, the object has a tax settlement value of £70,000. An object is, therefore, worth around 17% more if it is offered in lieu of tax than if it is sold on the open market at the same price.
“The scheme is very attractive from the point of view of the taxpayer and conceptually that is very attractive for executors, and it is relatively certain as well,” Natasha Hassall, a partner at Boodle Hatfield, said. “But it can be a difficult choice because you don’t know what you can get in the open market.”
What’s it worth?
Valuation is key, and executors and trustees need good advice in negotiating the price and how this squares with their tax liability. There can be practical difficulties when the tax liability is being calculated in tandem. For instance, if the acceptance price – the amount of tax the object settles – exceeds the tax due, HMRC cannot ‘give change’.
“Executors and trustees would need to think carefully before forgoing the difference, given that they need to act in the best interests of their beneficiaries and could face a claim if they don’t,” warns Idina Glyn, a partner at Mishcon Private.
Instead, Glyn suggests trying a hybrid offer, where the gallery or museum to which the object has been allocated funds the difference, usually up to a cap if the tax liability is still being agreed. This makes it even more important to have the right allocation in place.
“Galleries with limited funds may struggle to pay the top up if the value agreed falls short,” she said.
Enriching the taxpayer and national life
The main implication of the valuation on the inheritance tax liability of the estate is in the calculation of the acceptance or ‘special price’, which is based on the open market value, less the notional tax payable, and for objects, plus the 25% sweetener.
While that means the taxpayer can use the object to pay more tax than they would generate in net sale proceeds if they were to sell it on the open market, the value agreed with HMRC’s heritage team could fall short of the what the item could sell for at auction. Oliver Morgan-Crosby, director in Evelyn Partners’ private client tax team, said the mechanics of valuing the artwork is a material part of the thinking.
“If you were to take it to auction you could be looking at a substantially higher value than what someone in a dark room says is objectively the value of that painting,” Morgan-Crosby said. He added that in the case of a client considering donating a Picasso under the scheme, that uncertainty, coupled with a desire to keep the art in the UK, they accepted the lower price.
“Even though it had been given a lower value, there was enough value around the estate to supplement it and pay the inheritance tax,” Morgan-Crosby said. “And their motive was driven more by making sure it stayed within the UK and became part of the heritage.”
Case studies
In last year up to March 31, 2023, 48 items worth more than £52m were acquired under the AiL scheme and the Cultural Gifts Scheme, which allows for donors to give works during their lifetime in exchange for tax benefits.
Cultural gifts
Spitting Image archive, University of Cambridge, £167,100
Damien Hirst: Two medicine cabinets, National Galleries of Scotland, £90,000
Acceptance in lieu
Claude Monet: L’Epte à Giverny and Edgar Degas: Modiste garnissant un chapeau, Walker Art Gallery, £4,409,500
Pierre-Auguste Renoir: L’allée au bois, Ulster Museum, £1,457,300
Pier Jacopo Alari Bonacolsi (‘Antico’): The Apollo Belvedere, Fitzwilliam Museum, £10,500,000
Rembrandt Harmenszoon van Rijn: A Baby Sleeping in a Cradle, British Museum, £1,406,250
Alabaster relief of the murder of St Thomas Becket, British Museum, £665,000
Dame Barbara Hepworth: River Form, Ashmolean Museum, £2,556,601
Dame Barbara Hepworth: Single Form Tate (Barbara Hepworth Museum and Sculpture Garden), St Ives, £267,882
Frank Auerbach: Head of Helen Gillespie, National Portrait Gallery, £1,460,000
Model of a fighting vessel owned by Admiral Nelson, National Museum of the Royal Navy, Portsmouth, £105,000
Number and value of objects accepted 2013-23
PROVENANCE
How do we know a piece is legitimate?
In terms of due diligence before offering a work through the scheme, there is a pack of documents that needs to be put together.
Perhaps the most important of these is a questionnaire, designed to provide evidence that the offeror has good legal title to the item in question; details of its ownership, particularly between 1933-45 and if exported from abroad post 1970 a valid export licence from the country of origin.
“Defective title and issues around provenance are a live issue with museum collections coming under increasing scrutiny regarding the provenance, and title position of items within their existing collections,” Mishcon Private partner Idina Glyn says.
“In a climate where conversations around restitution are becoming more prevalent (and reflected in museum policy documents), it is essential that museums undertake effective and thorough due diligence on acquisition,” she adds.
Executors should also be aware of claims that may arise from the estate. For example, a residuary beneficiary may have set her heart on inheriting a particular piece of art from the estate, notwithstanding the potential tax disadvantages of her doing so.
Furthermore, the land that the executors of the estate intend to offer in lieu may have been promised by the deceased to another person, which was relied on by that person to their detriment, activating the doctrine of “proprietary estoppel”.
“This may enable this land to pass outside of the deceased’s person will, meaning that it could not be given in lieu,” Glyn says.
