Acceptance in Lieu scheme

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4 min read

In August 2017, the Arts Council announced that it had accepted a collection of Roman sculptures and artefacts from the Howard family of Castle Howard, North Yorkshire in settlement of an inheritance tax (IHT) liability of nearly £5.5 million.

In August 2017, the Arts Council announced that it had accepted a collection of Roman sculptures and artefacts from the Howard family of Castle Howard, North Yorkshire in settlement of an inheritance tax (IHT) liability of nearly £5.5 million.

The agreement was made under the Acceptance in Lieu (AIL) scheme, which allows taxpayers to offset some or all of their IHT liability by donating important cultural, scientific or historic objects to the nation. This article explains the scheme and some other options.

What items may be accepted in lieu of IHT?

The following assets can be accepted: 

  • Works of art 
  • Manuscripts 
  • Heritage objects 
  • Historic documents 
  • Land

The item in question must be in reasonable condition and be “pre-eminent”, ie, of particular historic, artistic, scientific or local significance, either individually or collectively, or closely associated with a particular historic setting.

How does the scheme work?

Offers made to HMRC are passed to an AIL panel to decide whether the object in question is pre-eminent and, if so, to assess its open market value. The final decision is made by the Secretary of State for culture, media and sport (or the appropriate minister in Scotland or Wales), based on the AIL panel’s recommendations. If accepted, the object is allocated to an appropriate museum, archive, gallery or other public institution.

Objects connected to a particular building

Quite often, the object(s) in question will have a strong link with a historic building in public ownership – for example a National Trust property.

Where this is the case, the taxpayer can ask for the object to remain in situ, provided there is sufficient public access to the object and appropriate security arrangements are in place. Ownership will still be transferred, so this can only be done with the agreement of the museum/ institution in question - the item is simply lent back to the taxpayer for display in its usual setting. For example, the Howard family items now belong to National Museums Liverpool, although they will remain on display at Castle Howard for the foreseeable future.

Benefits for the taxpayer

It is clear that the scheme offers benefits for the Government, as it allows pre-eminent works of art and other objects to be acquired for the benefit of the nation, which might previously have been locked away in private collections.

However, what are the benefits for the taxpayer? When determining the value of the asset for the purposes of the AIL scheme, the value used is net of any capital gains tax (and, if applicable, IHT) that would have been payable had the asset been sold on the open market.

However, to compensate the taxpayer (and to encourage them to use the AIL Scheme rather than selling the asset in question to a private buyer) an additional “douceur” is added to the net value. This is 10 per cent of the net value for land, and 25 per cent for other assets. As a result, an object offered in lieu of tax is generally worth 17 per cent more than if it were sold at auction.

Conditional exemption

An alternative to the AIL scheme is claiming conditional exemption. This allows the owner of a pre-eminent work of art or heritage asset to defer the IHT liability, if conditions are met. If the claim is accepted, the item is exempt from IHT. Undertakings must be given to HMRC, including: 

  • Allowing “reasonable” public access to the item 
  • Preserving the item 
  • Keeping it in the UK

If any of the undertakings are breached, the deferred IHT becomes immediately payable. IHT will also be payable if the item is sold, or the owner dies (although the beneficiaries of their estate could re-apply for the exemption).

Alternative planning?

The options set out above may not be suitable for everyone, particularly those who wish to keep valuable assets within the family without offering public access. There are many options to consider, including different types of lifetime giving which could potentially save a lot of IHT later on. As ever, it is important to take advice on your options so you can make an informed decision on how you would like to proceed.

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