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Could a family heirloom reduce your inheritance tax bill?

A little known scheme allows families liable for inheritance tax after the death of a loved one to offer up historically important artwork, furniture, artefacts and collections to the nation in lieu of paying all or part of their bill.

The Acceptance in Lieu (AIL) scheme, designed to preserve important assets of national significance within the UK for the public benefit, offers a not insignificant tax saving on items that meet the strict criteria set by HMRC after it has taken specialist advice from key independent experts.

Tax advantages

The family of politician Tony Benn recently made use of the scheme, donating his extensive collection of documents and recordings to the British Library and settling his £210,000 inheritance tax (IHT) bill as a result.

Margaret Thatcher’s family did the same. They gave her archive to Churchill College, Cambridge and saw their tax bill reduced by around £1 million.

Since 2004, cultural gifts worth more than £200 million have been obtained under the scheme with clear tax advantages to those administering the estates in question.

How does the scheme work?

Anyone liable for IHT or estate duty can offer assets in part or whole payment of that liability.

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 first step is to contact HMRC where checks will be carried out to see what liability there is for tax and duty and that the offer in lieu is being made by those persons liable for the tax.

Scrutiny

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.

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.

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

Complicated and long winded as the process is, it offers the advantage of being able to meet a tax liability in kind as well as a 25 per cent ‘cash back’ against the inheritance tax which would normally have been due.

This is how it works:

  • If, in order to settle a tax liability, an estate sells an object valued at £100,000 on the open market, IHT is generally payable at 40 per cent and the estate receives 60 per cent;
  • If the same object is offered and accepted in lieu, 25 per cent of the tax that would have been payable is remitted to the estate, giving the object a tax settlement value of 70 per cent;
  • An object is therefore worth around 17 per cent more if offered in lieu of tax than if it is sold on the open market at the same price.

For help, advice and guidance on this complicated area of the law and what to do next if you have an item for the AIL scheme, please contact Wards Solicitors’ Wills, Probate and Mental Capacity team by phone or pop into one of our 11 local offices.

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