Excluded property: does inheritance tax apply to medals?

Hannah Rees explains how a recent change in UK legislation affects inheritance tax on medals.

Taxation on Olympic medals won by US athletes has been a hot topic medals imagein recent months. Now that the Rio dust has settled, it is advisable for private client solicitors administering an estate that includes medals or awards of other types to consider the recent changes to UK legislation.

By way of recap, individuals can, subject to exemptions and reliefs, leave an estate of a prescribed ‘nil rate band’ (currently £325,000) before that estate becomes subject to inheritance tax at 40 per cent.  If the spousal exemption applies, and no nil rate band is then used on the death of the second spouse, the unused nil rate band can be carried forward and used in their estate to provide a 'double nil-rate band' (currently £650,000).

Moreover, the new residential nil rate band is being introduced in April 2017, which will undoubtedly be gratefully received by clients with estates subject to inheritance tax, but will also most likely cause a few headaches for probate lawyers in the next few years.  

Exemptions from tax

Section 6 of the Inheritance Tax Act 1984 deals with exemptions from tax. In respect of medals, until recently, that provided that ‘a decoration or other award is excluded property if… (a) it was awarded for valour or gallant conduct, and (b) it has never been the subject of a disposition for a consideration in money or money's worth’.

As such, until recently, any medals or awards that did not fall neatly under this exemption would form part of an individual’s estate for inheritance tax purposes. HMRC may well therefore have required that the award be valued for the calculation of inheritance tax as, in taxable estates, single items worth £500 or more must be listed individually on the inheritance tax schedule. Although military medals have long been recognised as achieving large sums at auction, other awards can also fetch a large price tag.

As can be seen, previously enacted Section 6 provided minimal protection from inheritance tax, as the exemption only applied to medals and other decorations awarded for ‘valour or gallant conduct’. Although medals such as the Victoria Cross, Military Cross and George Cross qualified for exemption, as well as some overseas medals such as the Legion D’Honneur and Croix de Guerre, others did not. 

Explaining to surviving family that the awards or medals received by their dearly departed did not qualify for exemption was not an easy conversation to have, especially if medals which would otherwise have passed down the generations would need to be sold to settle the inheritance tax liability.

The Finance Act 2015 extension

Following some scathing articles questioning the fairness of the exemption, former chancellor George Osborne announced in his 2014 autumn statement that the exemption would be extended, and the Finance Act 2015 received royal assent on 26 March 2015 (Gazette issue 61209). Section 74 of the Act serves to extend Section 6 of the 1984 Act in relation to excluded property.

In short, the exemption from inheritance tax has from 3 December 2014 been extended to all medals and decorations awarded by the crown or another country/territory outside of the UK to armed forces, emergency services personnel and individuals ‘for, or in connection with, public service or achievement in public life’.

Clearly, how valuable this change is to an estate will depend on the value of the award or medal itself, and the values can vary greatly. However, the expansion of Section 6 has been welcomed by many families who, as above, may have inherited a valuable family heirloom that would otherwise, arguably unfairly, need to be sold to meet the inheritance tax liability.

What happens if the medals are sold?

Of course, the exemption will only apply if the medal is never sold. If it is sold, the client should be informed that the sum received will fall back into the estate for inheritance tax purposes and, likewise, purchasers of medals at auction will not receive the exemption.

Clients who themselves have been awarded any such medals should also be informed of the current legal position and be warned that if they or their families sell these medals or awards, the funds will not be protected from inheritance tax if their future estate is taxable. If medals are passed on down the generations, a written record should be made of this and details of how the medal was awarded (should this ever be questioned at a later date).

The exemption also only applies to medals awarded to those in the armed forces, police, fire brigade, ambulance service and personnel in other ‘first response’ organisations. Unfortunately for Olympic athletes, it seems unlikely that their medals will qualify as a ‘relevant decoration or award’ under the newly amended Section 6 of the 1984 Act.

Crucially, the medal or award must be ‘...awarded by the crown or a country or territory outside the United Kingdom’ (so not the International Olympic Committee). As a consequence, Olympic medals would still be subject to inheritance tax and need dealing with in the same way as other household items of value. Time will tell, however, as to how widely the new wording can be interpreted.

About the author

Hannah Rees is a solicitor at Hugh James and advises new and existing clients on wills, trusts and estates matters. You can follow Hugh James on Twitter @HughJamesLegal.