As well as being a generous donation, Lucian Freud’s gift of a Corot painting to the National Gallery got his estate a tax break, thanks to the Acceptance in Lieu scheme
This week an important Corot portrait left to the nation by the late Lucian Freud went on display at the National Gallery.
Freud’s motivation for the donation of the painting, together with three Degas sculptures, was to thank Great Britain for welcoming his family when they fled the rise of Nazism in Berlin in 1933, when Freud was 11.
As an added bonus, the donations reduced the inheritance tax liability on Freud’s estate by £2.34 million through the Acceptance In Lieu (AIL) scheme.
The AIL scheme enables those liable to pay inheritance tax to transfer ‘pre-eminent’ works of art, other heritage objects and land and buildings into public ownership in full or part payment of inheritance tax.
Under the scheme, the full open market value of the item is transferred in the form of a tax credit with a 25 per cent douceur or ‘special price’ which is remitted to the estate (10 per cent in the case of land).
For example, if an estate sells an item valued at £100,000 on the open market in order to settle a tax liability, then inheritance tax at 40 per cent will be payable in respect of that item, meaning that the estate has proceeds of only £60,000 (disregarding the costs of sale).
If, instead, the item is offered under the AIL scheme, 25% of the £40,000 tax which would have been payable, ie £10,000, is remitted back to the estate, meaning that the estate effectively receives £70,000. This is the main financial incentive to taxpayers and is seen as an attractive alternative to selling through auction, with all the associated costs.
The Italian Woman or Woman with a Yellow Sleeve by Jean-Baptiste Camille Corot was gifted to the National Gallery by Lucian Freud, and is now on display to the public
Aside from the financial benefits, the scheme is also attractive because it enables art lovers to ensure that treasured items in their collection will be enjoyed by the public after their death.
Nevertheless, the decision to offer an item under the AIL scheme should not be taken lightly. The valuation for AIL purposes is intended to be an open market valuation, but this can be hard to assess without a sale — items which ‘fly’ at auction and far exceed all estimates hit the headlines, and by opting for AIL, the deceased’s executors close off this possibility.
A variant of the AIL scheme is due to be introduced for lifetime gifts, at a date to be appointed by the Treasury. This new scheme will offer a reduction in income tax and capital gains tax liabilities for individual or corporate donors who contribute pre-eminent items to public institutions, at 30 per cent the value of the works donated.
The AIL scheme has been enormously successful in securing important works of art for the nation while achieving significant tax savings for the estates of donors. In the year to 31 March 2012, objects worth £31.3 million were accepted in connection with 25 cases, settling tax liabilities of £20 million. The new lifetime scheme will provide further opportunities.
Individuals who own important items should not disregard the possibilities afforded by their collections when considering tax and estate planning options.
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William Hancock is a partner and Lisa-Jane Dupernex a senior solicitor in the private client team at Speechly Bircham LLP