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Jennifer Adams explores a long-standing Inheritance Tax (IHT) exemption.

Introduction

The next 50 days will keep financial journalists busy speculating as to what will remain from Alistair Darling’s last Finance Act and what will be repealed. We already know that an increase in the Capital Gains Tax charge on second homes is targeted and we can but hope that the lifetime exemption limit for Entrepreneurs' Relief will remain but somehow, from somewhere, billions of pounds needs to be raised.

National Heritage Property

One exemption that is guaranteed to remain is the one found in IHTA 1984 s 27 and IHTA 1984 Sch 4 (see also HMRC Inheritance Tax Manual - Section 20 - National Heritage Property) - the Conditional Exemption for Heritage Property. This section exempts from IHT assets of sufficient heritage importance on condition that undertakings are kept to conserve the assets and to provide reasonable public access. If such undertakings are breached the tax originally deferred is charged. The assets are placed on a ‘Register of Conditionally Exempt Objects’’ (see Tax-Exempt Heritage Assets) which currently lists 91,000 exempt chattels and 322 exemptions for land and buildings allowing Estate Duty, Capital Transfer Tax and Inheritance bills totalling £874 million to be deferred.

History of Heritage Property

The Exemption was first introduced in 1896 in the days of Estate Duty, when it was found that to satisfy the high tax bills, works of art of national interest were being sold and consequently lost to the Nation. Initially the scheme did not require public access meaning that the asset was invariably hidden away, never to be seen again (i.e., the Nation was unable to see the asset that was supposed to have been preserved for them).

Acess to Heritage Assets

Therefore in 1976 access requirements were introduced, with the Register coming into being in 1981. These access requirements were either open access or viewing-by-appointment if the owners could prove that they could not display the item in a museum or room open to the public. Despite these new requirements and the Register, many items remained unseen as making contact with the owner to set up an appointment at their private home was difficult. The Finance Act 1998 introduced further changes with regard to access and more importantly changes as to exactly what could be placed on the Register (s 142 and Schedule 5 (5)). With regard to access the facility for an owner to opt for viewing-by-appointment was withdrawn. Now, only open access remains for items placed on the Register post-1998; which in practice means being made available on at least 30 days of a year. For assets already on the Register pre-1998 it was decided that open access might not be reasonable for example where owners hold a few items of interest. Viewing-by-appointment remains for those items but only where agreed with HMRC. This invariably means that some items remain hard to be seen; last year only one in seven of owners owning ‘by appointment’ chattels had a visitor.

For a humorous example of someone’s attempts to view see this article: Latest News from the Conditionally Exempt Works Appreciation Party

HMRC Checks

HMRC does undertake periodic checks to see that the exemption conditions are being adhered to. With chattels this means a detailed five-yearly questionnaire being sent to all owners and fine art students being employed at a total cost of between £5,000 and £10,000 a year to undertake inspection visits on a random basis to approximately 80 owners each year. These visits check that the chattels remain in place and are in good repair. To date there have been no cases of tax becoming payable because the chattel had been sold and HMRC state that it is not aware of any cases where a replica has been substituted for the exempt item although whether substitution would be detectable is another question.

New Higher Standard

Prior to 1998 so long as the assets were of a national, scientific, historic or artistic value and were of sufficient quality to be shown in a public collection then the item could be placed on the Register; post-1998 the item needs to be of sufficiently high quality to be added to a National collection or an important regional collection. The words used are ‘pre-eminent’ and the job of deciding what is ‘pre-eminent’ and what is not has been given to the Museum Libraries and Archive Council. The Guidelines for acceptance are detailed at 
Private Treaty Sales and the criteria (only one of which needs to be fulfilled) are:

1. Does the object have an especially close association with UK history and national life?
2. Is the object of especial artistic or art-historical interest?
3. Is the object of especial importance for the study of some particular form of art, learning or history?

It is only for ‘stand alone’ chattels that the procedure has changed. If a chattel is historically associated with a building deemed to be of ‘outstanding historic or architectural interest’; (i.e., having been housed in said building for more than 50 years) then the original rules stand and the chattel does not need to be ‘pre-eminent’ in its own right.

Tax Consequences of Failing to Meet New Criteria - and How to Avoid Them

Eventually the number of assets on the Register will decline as the view-by-appointment items will be eliminated either by renegotiation or by applying the more stringent new post-1998 criteria for open access when the current owners die. Before the 1998 Act the asset could be inherited on death and so long as the new owner was able to renew the undertakings under the same conditions in place at the date of death then the tax would remain deferred. Now because a large number of the assets on the Register are not what could be deemed of ‘National’ standard when the owner of such an asset dies IHT will be due at current IHT rates on the current IHT value because the item no longer satisfies the current conditions and in addition, any tax originally deferred because of undertakings given at the time will crystallise. Therefore not only will IHT be due but possibly even Estate Duty if the original undertakings had been given under the Estate Duty rules. The situation is worse if the estate cannot pay the tax due and has to sell the asset privately -  CGT will be payable as well as the IHT and Estate Duty charge.

So what advice can be given to clients faced with this situation? Well, not much really. The only course of action if the client wants to keep the asset in the family is to gift the problem to another generation in the hope that whatever form of Government is in power they will revise the restrictions although it must be said that with the Budget deficit as high as it is, it is extremely unlikely that the rules will be made any easier. It the asset is gifted now and the original undertakings renewed thereby keeping the asset on the Register, the gift is a PET but the donee must be made aware that before he or she dies the asset must be gifted again and also live for the prerequisite seven years and so on. If there are no relatives willing to take on the housing, etc., of the asset (the insurance premiums may be too hefty for example) then consideration should be given to gifting the asset to an approved body when exemption from both the CGT and IHT charges is possible or to taking advantage of the ‘Acceptance in Lieu’ scheme.

Heritage Exemption Register 

Ask anyone not a tax adviser whether they know of the  IHT ‘Heritage Exemption’ Register and the answer will invariably be in the negative despite HMRC stating that a number of initiatives are in place to advertise the scheme (for example liaison with tourist authorities and  libraries - have you seen any poster/ booklet  in your local library?) Meanwhile take a look at the Register on the website and arrange to see those items that you find interesting but which may not be of sufficiently high standard to pass the 1998 rules as they may not be around to view much longer.

The Register includes a particularly fine set of Canaletto’s, a couple of vintage Aston Martins and even an embroidered stomacher and for anyone interested in Sir Francis Chichester ten items are listed including  a medallion presented to Sir Francis by the Royal Yacht Squadron made of metal from the ‘Cutty Sark’. Fancy a look? Ring its keepers Mannooch, Chartered Accountants in South Croydon, Surrey and arrange a viewing.