The art of gifting and gifting of art: acceptance in lieu

PaintingSince 2004, over 220 million pounds-worth of cultural gifts have been obtained by the nation under the acceptance in lieu (AIL) scheme. Danny Cox of Hargreaves Lansdown examines the scheme and its tax advantages.

The motives behind gifting are generally:

  • to help someone out
  • to keep wealth or an heirloom in the family
  • to save tax

The inheritance tax (IHT) rules around gifting are designed to allow forward planning and to promote charitable giving, but without excessive so-called ‘death bed’ actions. Assets including works of art are included in the value of an estate for IHT calculation purposes, potentially being subject to a 40% tax charge.

It’s not just inheritance tax that needs to be considered. A lifetime gift of an asset or work of art usually creates a charge to capital gains tax at the point the gift is made of up to 28%. That’s marginally better tax value that the full fat IHT rate, but still a chunky tax charge to be met from cash.

Acceptance in lieu

The AIL scheme is designed as a tax efficient way to allow gifts of art and important heritage objects to museums or other public ownership. The gift is made on death and the object value is used to meet some or all of the IHT liability. A further incentive is that 25% of the IHT levied on the value of the gift is refunded to the estate. AIL can also apply to land and buildings where the IHT incentive is 10%.

Objects gifted must meet a certain criteria to be accepted: they must be 'pre-eminent' and of particular historic, artistic, scientific or local significance, and be in acceptable condition. To qualify as an AIL, the gift must be approved by the secretary of state for culture, media and sport, who is advised by Arts Council England's AIL panel.

The secretary of state ensures the object passes to a public institution that offers access to the most number of people. Where an object has a link to a specific building, such as a National Trust property, it will be transferred to the owner of the building to best match its context, but only if there is sufficient public access.

The tax benefit to the person offering the object is 17%, as this example shows.

Object left in the estate for distribution:

  • Object value: £100,000
  • IHT at 40%: £40,000
  • Net value to estate: £60,000

 The estate has to find the £40,000 to pay the IHT, or the object has to be sold.

Using acceptance in lieu:

  • Object value passed to HMRC: £100,000
  • IHT at 40%: £40,000
  • Tax benefit for using AIL: £10,000
  • Net value to estate: £70,000 or 17% higher than £60,000

However, HMRC won’t give change if the object’s value is greater than the amount of IHT chargeable.

Giving assets to charity

An alternative to AIL is to give the asset to charity. The values of gifts to registered charities are free from IHT taxation. Furthermore, if the total of gifts to registered charities is 10% of the taxable value of the estate or more, in addition to the value of the gifts being exempt from IHT, the rate of IHT payable is reduced by 10%, from 40% to 36%.

Without charitable legacies

  • Estate: £900,000
  • Nil-rate band: (£325,000)
  • Taxable estate: £575,000
  • IHT @ 40% of taxable estate: £230,000
  • Net estate for distribution: £670,000

With charitable legacies

  • Estate: £900,000
  • Gifts to registered charities: (£75,000)
  • Nil-rate band: (£325,000)
  • Taxable estate: £500,000
  • IHT @ 36% of taxable estate: £180,000
  • Charitable gifts: £75,000
  • Net estate for distribution: £645,000

The key point with this planning is that beneficiaries do not receive larger legacies, the tax saving works in favour of the charities.

With all of the recent changes to the inheritability of ISAs, the tax position improving on pension death benefits, and the change of tax rate if 10% of a taxable estate is left to charity, investors should review their wills and IHT mitigation plans.

About the author

Danny Cox is a Chartered Financial Planner at Hargreaves Lansdown. He has worked in the financial services sector since 1989 and is among an elite group across the UK to hold both the prestigious Certified Financial Planner and Chartered Financial Planner status.