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  1. Wealth
September 10, 2019

Acceptance in Lieu explained: How cultural donations can lead to ‘tax benefits’

By Spear's

A government scheme enables HNWs to donate items of cultural significance in exchange for tax benefits, writes Ceris Gardner

Watching Eoin Morgan and the boys give the nation something to cheer about (winning the Cricket World Cup, for those of you who were instead watching the longest men’s singles final at Wimbledon) turned my mind to what each of us may be able to give the nation if our yorkers or backhands leave a lot to be desired.

One way in is the Acceptance in Lieu (AIL) scheme, which allows for objects or land of pre-eminent importance to be offered in lieu of an inheritance tax liability. In the 2017-18 tax year, under AIL the nation benefited from 35 gifts, including a Degas sculpture, more than 50 acres of New Forest woodland and a toy theatre collection owned by the late Peter Baldwin of Coronation Street fame.

Of course there are tax advantages to the Acceptance in Lieu scheme, specifically that the ‘price’ realised for an accepted object is 17 per cent higher than that of an open sale (as 25 per cent of the otherwise chargeable inheritance tax is remitted to the estate), but this is dwarfed by the wider benefit of ensuring that distinguished cultural objects do not leave the UK if they are sold to overseas buyers to fund a tax liability.

AIL can be used for lifetime inheritance tax charges (eg in the case of trust ten-year charges) but mostly is used to settle inheritance tax on death. As a private client lawyer, I will always advise my clients that an effective estate plan is one that has been properly considered with sufficient time to plan and implement. Hoping an object qualifies for AIL on death is not sensible planning. Instead of the wait-and-see approach, let me introduce AIL’s younger sibling – the Cultural Gifts Scheme (CGS).

This enables UK taxpayers to donate important works of art and other cultural objects during their lifetime for the benefit of the nation.

The headline tax benefits are:

● Individuals receive 30 per cent of the agreed value of the object to use against liabilities to income tax and capital gains tax within the five tax years starting with the tax year the offer is made in.

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● Companies receive 20 per cent of the agreed value of the object to use against liabilities to corporation tax within the accounting period the offer is made in.

● The gift itself does not attract a liability to tax.

Giving during one’s lifetime also allows the donor to see their gift enjoyed by the recipient. Donors can suggest where an object should go and in lots of cases, institutions are approached in advance so that the Arts Council (which administers the scheme) knows that if it agrees a gift meets the required criteria it will have a good home to go to.

AIL and the CGS have a joint budget of £40 million (that is the amount of tax ‘forgiven’, rather than the objects’ value) which leaves plenty of scope for the nation to receive many more gifts than it does.

Remote control

The latest government proposal, among the wealth of initiatives that have been introduced, is the implementation of a register of persons with significant control of companies which hold UK property. The proposal is for this register to be publicly accessible and hosted by Companies House, with a statutory restriction preventing any dealing with the property in question unless the requirements of the register have been met.

The draft legislation for the register intentionally carves out certain trusts from its scope. While this has been welcomed by some, the Parliamentary Joint Committee’s report on the Bill (published in May) expressed concern that trusts could be used to circumvent the obligations imposed by the Bill, given that they fall outside its scope. It remains to be seen whether the government will take these concerns on board.

The government has also recently consulted on the possibility of extending the UK trust register to a publicly searchable register of the beneficial ownership of trusts (including both trusts generating a tax consequence in the UK and any non-EU trust which enters into a business relationship with an ‘obliged entity’ i.e. an entity already subject to anti-money laundering procedures, regulations and requirements). It seems to me difficult to justify a policy whereby more information could be available in relation to assets held in trust (and their beneficiaries) than in relation to an individual taxpayer’s personally held assets.

This is particularly puzzling given that the UK government has expressly acknowledged in its consultation paper the National Risk Assessment’s conclusion that UK trusts present a low risk of money laundering and terrorist financing. The government would do well to remember that transparency and confidentiality are not mutually exclusive aims.

Ceris Gardner is a founding partner of Maurice Turnor Gardner and a winner of both the Spear’s and STEP Trusted Adviser awards.

This article first appeared in issue 70 of Spear’s magazine, available on newsstands now. Click here to buy and subscribe. 

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