Last year, almost £60 million worth of art and other cultural treasures passed from private hands into the UK’s public collections under government tax incentive schemes, according to Arts Council England. The figure, from 32 cases, marks a 33 per cent increase on the year before, and is the second-highest total since 2015.
For wealthy collectors, two schemes, Acceptance in Lieu (AIL) and the Cultural Gifts Scheme (CGS), offer another way of mitigating a tax liability. Rather than simply selling a painting to raise funds to pay an inheritance tax (IHT) bill, for example, the owner of a valuable artwork can choose to hand it over to the state. There are several benefits of doing so, but you can’t offer just anything; the cultural, artistic, historic and/or scientific importance of each work is heavily scrutinised by experts before the government agrees to take it.
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Under AIL, the owner receives a tax credit based on the work’s agreed value, with an additional incentive, the douceur (French for ‘sweetener’), worth 25 per cent of the IHT that would otherwise be payable, factored into the calculation.
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CGS works differently, providing tax relief against income tax and capital gains tax for qualifying lifetime gifts. As Clarissa Levi, art and heritage counsel at Wedlake Bell, explains, the key distinction between the schemes is that AIL, introduced in 1910, is essentially a death-and-inheritance-tax mechanism, while CGS was introduced in 2013 to allow a similar public benefit during the owner’s lifetime.
Recent AIL examples include Claude Monet’s L’Epte à Giverny, allocated to Liverpool’s Walker Art Gallery, and Barbara Hepworth’s Orpheus (Maquette 1), which went to The Hepworth Wakefield. London’s major museums have historically been the biggest beneficiaries of AIL, but Levi says she encourages her clients to consider regional museums, where their gifts can make a greater impact.
At first glance, cynics might view the schemes as a tax dodge for well-heeled collectors. But Levi argues that this misses the point: ‘The purpose of the AIL scheme is to protect our heritage objects in this country for future generations, and to stop them being sold abroad.’
The total value of art donated to the government could rise further as the tax landscape under Labour shifts. Recent changes to Business Property Relief (BPR) mean some wealthy families will face larger IHT bills than they had previously expected, potentially making AIL a more attractive option.
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The overhaul of the non-dom regime could also bring more international wealth into the IHT net. Under the new residence-based system, some mobile individuals who were previously outside the scope of UK IHT may find their global assets exposed to it, including art collections held overseas.
But, according to Sunir Watts, a partner at Hunters Law, that doesn’t necessarily mean a rush of foreign collections into British museums. He emphasises that artistic significance tests remain demanding, while the schemes have a combined annual limit of £40 million in tax foregone. Overseas collections also bring complications, from export restrictions and foreign tax liabilities to the cost of transporting works to the UK.
‘The impact [of BPR changes] on art collections will largely be indirect,’ says Watts. And while the non-dom reforms could expose more internationally held collections to UK IHT, he questions if this will translate into more AIL applications.
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For families considering AIL, the advice is to start planning well before an IHT liability arises. Watts recommends obtaining accurate valuations early, identifying which works might meet the demanding pre-eminence test and considering where they could ultimately be allocated. The biggest mistake, he says, is assuming that an artwork’s value alone makes it eligible: ‘A work may be worth a substantial amount and yet not possess the pre-eminence necessary for acceptance.’
However, the people most drawn to AIL are often motivated by stewardship rather than purely financial considerations, observes Levi. ‘They regard themselves as custodians of culturally important objects,’ she says, adding that there is a particular appeal in seeing a family art acquisition pass into public ownership. ‘It makes a bit of a legacy of it because their objects can become part of the national collection.’
