Another Downton-related issue (after my recent consideration of the importance of having a valid Will) is the extent to which real property can be favourably treated for inheritance tax purposes.
Now clearly, your ordinary semi (or even detached) family home can’t – even if it has had its “underneath” dug out to provide a subterranean “entertainment complex”.
But Lord Grantham’s gaff and others like it – well that might be a different story. As I have re-acquainted myself with various National Trust properties over the past couple of years, it has been evident that many of the gifts that led to some of these wonderful structures becoming National Trust property were, at least partially, tax motivated.
The subject (the National Trust and gifts of property to it) even formed the basis of the recent Alan Bennett play, “People”, performed at the National – excellent performance by Frances De La Tour by the way.
So what if you have a pretty fancy drum that it is hard to realise the capital value from but the IHT on it is significant? Is there any relief at hand?
Well there is – if you are prepared to pay the price and accept the compromise on outright, unrestricted ownership.
Relief could be at hand, for example, if the property is a listed building or heritage asset. There are a number of tax breaks that can benefit the owners of heritage assets to assist with their conservation.
The conditions and qualifications are a matter of some complexity and specialist advice should be sought by anyone who believes they may qualify for relief. The following is only a brief introduction largely drawn from the “English Heritage” website.
I will look at capital gains tax first. Capital gains tax reliefs, such as the principal private residence and roll-over reliefs, apply to heritage assets just as they do to any other building or site, ie subject to the same conditions.
Gifts of “qualifying property” to a charity and to certain heritage bodies, such as English Heritage, the National Trust, the National Churches Trust, Natural England, any local authority, Government department or university also qualify for roll-over relief for capital gains tax purposes and are exempt from inheritance tax.
There are also special provisions to assist a fund set up for the maintenance of a building of outstanding interest, its amenity land and objects historically associated with it, and also for land of outstanding scenic, scientific or historic interest. Relief from capital gains tax and inheritance tax may be available when the fund is set up, on the income of the fund and also when capital is applied from the fund for a purpose connected with the property.
In addition, there is conditional exemption from inheritance tax for buildings of outstanding interest. The basic rule in relation to inheritance tax is that tax is payable on the death of an owner or on a gift made within 7 years of death. This may be exempted if the asset falls into one of the following categories:
- Objects or collections of objects pre-eminent for their national, scientific, historic or artistic interest
- Land of outstanding scenic, scientific or historic interest
- Buildings of outstanding historic or architectural interest
- Land essential for the protection of the character and amenities of an outstanding building
- Objects historically associated with an outstanding building
The new owner must undertake that reasonable access will be provided for the public (which wouldn’t go down well with Lord Grantham despite his experience of mixing with the commoners at the annual “toffs v proles” cricket match) and that reasonable steps will be taken for maintenance, preservation and repair.
What is “outstanding” is a matter of judgment but, in the case of buildings, it is likely that such buildings will be listed at Grade 1 or will be a scheduled monument.
HMRC takes advice from English Heritage, Natural England and other specialist public bodies on whether a property qualifies for the conditional exemption.
Conditional exemption is not lost on the subsequent disposal of the property, on the subsequent death of the recipient or a further lifetime transfer or gift to a heritage body as long as further undertakings as to access and maintenance are entered into by the new owner.
If conditionally exempt property, or property which would qualify for conditional exemption, is sold on the open market any tax exemption is lost and the seller may also be liable to capital gains tax on the sale proceeds. The tax charges can be substantial and the final net amount retained by the seller significantly less than the proceeds of sale.
As well as the conditional exemption, private treaty sales to some museum and heritage bodies (eg the National Trust) frequently offer substantial financial advantages to owners.
Sale by private treaty to one of these bodies does not lead to the withdrawal of the conditional exemption or to a charge to inheritance or capital gains tax. As the seller receives the proceeds without any liability to tax it is not unreasonable that the acquiring institution should offer, and the seller be prepared to accept, a lower price than would prevail if the proceeds were taxable. Tax arbitrage to benefit the nation – who could argue with that!?
The arrangement enables the acquiring institution to pay the agreed market value net of the tax the seller would have had to pay, sweetened by an agreed percentage of that tax (the so-called douceur). This is called the “special price”. In this way the seller and the acquiring institution share the value of the tax exemption.
Lastly, there is the “Acceptance in Lieu Scheme”. And no this doesn’t mean a shady property deal transacted in a public convenience. The Acceptance in Lieu Scheme enables taxpayers to transfer heritage assets into public ownership in part or full payment of an inheritance tax liability.
The taxpayer is given the full open market value of the item, which is then allocated to a public museum, archive or library. In satisfying a tax liability, an offeror is able to apply a higher proportion of the value of an object if it is offered in lieu of tax than if the same object is offered at auction in order to raise funds to settle the tax liability.
The scheme is administered by the Arts Council and the Department for Culture, Media and Sport.
Tony Wickenden is joint managing director of Technical Connection
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