In 2018, individuals gifted approximately £10.1billion (CAF UK Giving 2019 Report ) in cash to charity of which 2% was to the ‘Arts’ sector. HMRC offers a number of tax incentives for individuals to encourage charitable giving.
Gift Aid
The most widely recognised of charitable tax incentives for individuals is the Gift Aid scheme. Gift aid was introduced in 1990 and, at first, only cash gifts to UK charities that exceeded £600 were eligible for relief. This minimum threshold was completely removed in 2000 and, in 2010, Gift Aid was extended to charities within EU member states, Norway and Iceland.
The Gift Aid scheme benefits individual taxpayers who gift cash to charity as it allows the donor to claim higher and additional rate tax relief on gift and there is currently no upper limit on the amount of gift aid relief that can be claimed. In addition, the charity is able to reclaim tax on the donation at basic rate which means that for every £1 donated the charity can reclaim 25p. Compared to other reliefs this maximises the value of the donation received by charities.
Given the parlous funding of the arts in the UK and reduction in government subsidy, this may be an important consideration for donors.
Gifts of shares, securities and real property
A number of tax reliefs are available for individuals who wish to gift qualifying assets to charity. Qualifying assets include:
- shares or securities listed on a recognised stock exchange, such as the London Stock Exchange, or Alternative Investment Market and any recognised overseas stock exchange.
- units in an Authorised Unit Trust
- shares in an UK Open-Ended Investment Company
- freehold interest in land or buildings in the UK, and
- leasehold interest in land or buildings situated in the UK.
Income Tax relief is available for qualifying assets gifted to charity. The relief is given by way of a deduction against income which means that it is particularly beneficial for the donor as they receive the full benefit of relief when compared to Gift Aid, where the benefit is split with the charity.
In addition, a gift of a qualifying asset will qualify for Capital Gains Tax relief. The asset will treated as being disposed of at cost meaning that no capital gains tax will be payable on the transfer.
Finally, legacies and inter-vivos transfers to charities qualify for Inheritance Tax relief. Assets and cash transferred to charity are completely exempt from Inheritance Tax and if more than 10% of as estate is left to charity, the Inheritance Tax Rate is reduced from 40% to 36% on the remaining estate.
Conditional Exemption for Heritage Assets
An exemption from Inheritance Tax and Capital Gains Tax is available for individuals who own heritage assets such as buildings, land, works of art and other qualifying assets, provided certain conditions are met. HMRC’s intention for this tax incentive is to protect the assets from being sold privately and to retain public access to the artefacts.
Pursuant to the Conditional Exemption relief, no tax will be payable when the asset is either gifted to a new owner or passes on death, provided that the new owner:
- agrees to take responsibility for maintaining the item,
- allows the public ‘reasonable’ access to the item without prior appointment, subject to the item’s condition, and
- retains the item in the UK.
Generally speaking, in order for an asset to qualify for Conditional Exemption it must be pre-eminent for its national, scientific, historic or artistic interest. There is no statutory definition of pre-eminence but the following guidelines are customarily borne in mind:
- Does the object have an especially close association with our history and national life?
- Is the object of especial artistic or art-historical interest?
- Is the object of especial importance for the study of some particular form of art, learning or history?
- Does the object have an especially close association with a particular historic setting?
HMRC determines which assets will qualify for the exemption on the advice of the government’s heritage advisory team from the Arts Council. In order to qualify the asset must be one of the following:
- A collection or group of objects which taken as a whole is pre-eminent.
- Any building worthy of preservation by reason of outstanding historic or architectural interest.
- Any land essential for the protection of the character and amenities of such a building.
- Any object that is historically associated with such a building (generally requires an association of at least 50 years).
The definition of an ‘object’ is widely drawn and can include a picture, print, book, manuscript, work of art or scientific object, or as a catch-all anything else that does not yield an income.
It is important to note that the exemption may be withdrawn if the criteria do not continue to be met so professional advice should be sought by those who are considering applying for the exemption.
Acceptance-In-Lieu Scheme
The acceptance-in-lieu scheme enables donors to transfer ‘pre-eminent’ works of art and other heritage objects into public ownership in satisfaction of their Inheritance Tax liability. The pre-eminence criteria are broadly the same as for those to obtain Conditional Exemption.
The amount of Inheritance Tax satisfied is the open market value of the item, less the Inheritance Tax that would have been payable on that object (currently 40%), plus an incentive, known as a douceur, of 25% of the notional tax.
By way of an example, if an individual offered an object worth £100,000 in lieu of part of an Inheritance Tax liability, they would receive a total credit of £70,000 against their overall Inheritance Tax Liability. This is calculated as follows:
Market Value of Object: £100,000
Less a deduction for IHT on the object @ 40%: - 40,000
Plus 25% douceur of notional tax: (£40,000x25%) +10,000
Inheritance Tax Relief 70,000
Cultural Gifts Scheme
The Cultural Gifts Scheme was introduced in Finance Act 2012 to encourage lifetime giving of pre-eminent objects, or collections of objects to the nation.
The scheme is available to both individuals and companies and operates in a similar manner to the acceptance-in-lieu scheme. The Cultural Gifts Scheme allows for gifts of Works of Art (again provided that they are judged to be pre-eminent) and for relief to be claimed against Income Tax and Capital Gains Tax for individuals, and Corporation Tax for companies in either the year of the gift or in any of the next four tax years. The total tax reduction figure is 30% of the agreed market value of property for individuals and 20% for companies. Given the potential value of this relief, careful consideration should be given as to how the relief can be fully utilised if spread across tax years.
Since 2013, the total value of art and other pre-eminent objects relieved under both the Acceptance-in-Lieu and Cultural Gifts scheme is just under £245million with total tax relieved of £155million. (Arts Council Cultural Gifts Scheme & Acceptance in Lieu Report 2018).
The Acceptance-in-Lieu Panel has a total annual budget of £40million tax foregone which is shared between the Acceptance-in-Lieu and Cultural Gifts schemes and they consider applications on a first come, first serve, basis. Professional advice should be sought by those individuals wishing to make a claims under scheme to calculate the most tax effective allocation of relief available.
Disclaimer: The information contained in this article does not constitute advice and is intended solely to provide the reader with an outline of the relevant provisions. It is not a substitute for specialist advice in respect of individual circumstances.
