Inheritance tax and The Acceptance-in- Lieu scheme (“AIL”)

As a general rule the assets of a deceased person over the value of the nil rate band (currently £325,000) are chargeable at 40% inheritance tax.  However, since 1910 the UK government has encouraged those administering estates, responsible for ensuring that the tax is assessed and paid, to consider offering works of art and important heritage objects to the nation in lieu of inheritance tax.

In addition to the advantage of being able to meet a tax liability in kind, the scheme offers a financial sweetener (known as the douceur) to provide an even greater incentive to make use of the scheme.

The criteria 

The art or objects must be ‘pre-eminent’: in other words, of particular historic, artistic, scientific or local significance, either individually or collectively, or associated with a building in public ownership. A very wide range of objects is accepted each year as may be seen in the annual reports published by the Arts Council.

The art or objects must be in an acceptable condition.

The process

Offers must be made to the Heritage Team at HMRC. Those offers must be approved by the Secretary of State for Digital, Culture, Media and Sport (or the appropriate Minister in the devolved governments in Scotland and Wales) who is advised by Arts Council England’s AIL Panel. The AIL Panel consists of independent experts who seek specialist advice on the art or objects offered.

Key elements of any offer will be a valuation and justification for that valuation (generally independent opinion from more than one source is helpful); an explanation of why the object is considered pre-eminent; digital images and details of where the object can be inspected; evidence that the offeror has good legal title to the object (and details of its ownership between 1933-1945). Assets must be offered for an AIL within two years of the relevant event, which is typically a death.

The douceur

In order to attract some of the finest works into national ownership the government offers a financial incentive to those administering estates. The sweetener consists of what amounts to a 25% “cash-back” calculated against the inheritance tax that would normally have been due.

By way of example: Mr Osterman’s estate contains an important Modern British work on paper. At date of death the piece was valued by an independent expert at £100,000. Mr Osterman’s son is the sole residuary beneficiary and executor and he decides to offer the painting in lieu of the inheritance tax liability of £40,000. The AIL Panel confirm the piece to be pre-eminent and agree a value of £100,000. The douceur is calculated as 25% of the inheritance tax due on the painting: 25% x £40,000 = £10,000. Osterman junior receives £70,000 for the piece (i.e. less the inheritance tax as adjusted for the douceur), the tax liability is cleared and the nation gains a pre-eminent work for the public to enjoy.

It was recently announced that Stephen Hawking’s scientific and personal papers are the subject of an AIL. As a result, they will be on public display in various English public institutions as early as 2022.

Have a look at the fantastic outcome here:

Every case will be different. The scheme offers an opportunity to make a not-insignificant tax saving on items that meet the criteria. At the same time bear in mind that there will be occasions when an item might achieve a better overall result (tax liability included) when sold on the open market (or indeed by a private sale).

What about the Conditional Exemption?

If IHT becomes due on pre-eminent assets, owners can as an alternative defer the tax indefinitely, provided they undertake to HMRC that they will keep the assets in the UK, preserve them, and allow “reasonable public access” to them.

What is reasonable public access has to be agreed with HMRC and will depend on the type of asset.

It could involve lending an object to a museum or gallery or, if it is to remain in situ, allowing public access for a certain number of days a year.

The exemption is conditional because a breach of the undertakings – a sale, typically – will mean the withdrawal of the exemption and the deferred tax charge falling due.

If the asset passes on death, or as a gift, the owner can renew the undertakings to avoid loss of the exemption.