Taxation update: Acceptance in Lieu Of Tax

The Acceptance in Lieu (AIL) scheme allows a taxpayer who has an Inheritance Tax (IHT) or Estate Duty liability to offer eligible property of significant cultural or historical importance to the Government in full or part payment of tax. The scheme is key to retaining the UK’s cultural heritage.

One of the biggest hurdles is the pre-eminence test. For individual objects and collections this is an extremely high bar in terms of quality which falls to be determined by experts at the Arts Council England. Today's standard is much higher than the old "museum quality" test which applied before Labour removed it in 1998. An object qualifies for acceptance in lieu of tax on the grounds of its pre-eminence will automatically qualify for conditional exemption.

Eligible property includes:

• Objects (and collections), such as pictures, prints, books, manuscripts, works of art or scientific objects, considered to be "pre-eminent" for their national, scientific, historic or artistic interest.
• Objects (and collections) which might be of lesser quality but which are kept in and/or have an especially close association with an important (qualifying) historic setting.
• Land and buildings considered to be outstanding in terms of the natural or built heritage.

An application under the AIL scheme is to HMRC in the first instance by the person liable to pay tax, (usually the executors of an estate). Whilst strictly speaking there are no time limits for submitting an application, the tax payment deadlines for IHT usually drive the timing. HMRC normally require the tax liability to be paid up front and then repay once the full process is complete.

A professional valuation of the property is necessary which must provide a detailed description of the property, together with photographs and evidence of the legal title.

The tax advantages

The main benefit of the AIL scheme to the taxpayer is the "tax credit" that is generated by the acceptance of an offer which will often entail items not exempt by historic association to a building, being moved to a national museum. The market value of the property will be assessed by the AIL Panel in consultation with their expert advisors. If that is accepted, the taxpayer will then receive a "special price" for the item. This is net value of the object after deducting the notional tax that would have been payable on its sale, but with the benefit of the “douceur". This equates to 25% of the notional tax on the object (or 10% in the case of land and buildings) and the taxpayer gets the credit for this amount. As such the scheme is fairly attractive especially if the estate is short of cash to cover the general IHT liability.

It is important to note that the true open market value, especially of a rare object, may be hard to estimate although Lyon & Turnbull are well placed to give advice in this area. The uncertainty for the owner is that if object was sold at auction there is always a chance that it would exceed the untested valuation agreed for the purposes of AIL even after the relevant taxes are paid. The AIL scheme may still be attractive because it offers a degree of certainty and a sale by auction can be risky and there are costs such as commission etc.

One bear trap to be aware of is that if the valuation of the item in question is higher than expected and the resultant “tax credit” is higher than the estate’s overall IHT liability, there is no cash refund of the difference and the excess value is effectively lost. The options open to the taxpayer are either to withdraw the object or forgo the excess. In certain situations a 'hybrid' offer can be considered which is outside the scope of this article.

Conclusions

As illustrated above, acceptance of heritage property in lieu of tax can have significant financial advantages for the taxpayer, particularly when a large IHT needs to be managed against other assets of the estate potentially being sold instead.

AIL may make more sense for items with a high estate duty rate, as the 25% "douceur" is then much more valuable. AIL might also be more attractive than other options, particularly where objects have a close association with an historic building, in which case HMRC may allow them to remain where they are after they have been accepted for the scheme.

Tax planning should always take individual circumstances into account and most importantly the wishes of the family. This article only gives a brief introduction to the AIL scheme and we recommend that professional advice be taken.

Jamie Younger CA CTA is head of the Landed Estates Group at Saffery Champness and specialises in providing advice to individuals, families and their business interests, both in Scotland and England. He can be contacted at +44 (0)131 221 2773 or jamie.younger@saffery.com.