Acceptance in Lieu & Cultural Gifts Scheme

Pablo Picasso’s daughter recently made headlines by donating some of his multi-million euro artworks to the French state, in lieu of inheritance tax. The story has brought renewed attention to similar schemes elsewhere, including the UK’s Acceptance in Lieu Scheme and Cultural Gifts Scheme, both of which work on the principle of donating significant cultural artefacts to the state to offset tax. But how do these schemes work, and where are they appropriate?

AIL

The Acceptance in Lieu (AIL) scheme has for many years enabled the donation of high value yet culturally pre-eminent assets, works of art, objects of national importance, land and buildings to the public with the benefit of enabling the
deceased estate from which it is coming from to off-set its inheritance tax bill.

However, this means hanging onto the asset until someone dies and this wait-and-see approach may not always be beneficial. In additional the asset may also benefit from a douceur* making it more attractive to transfer an asset to a
public institution than to sell it on the open market – 25% for most assets and 10% for land.

For example, Mr A dies and he had a valuable antique vase worth £500,000 that would attract IHT liability of £200,000. If the vase was sold to settle the tax, the estate would receive £300,000. If AIL is successfully claimed a 25%
douceur is added to the IHT payable, amounting to £50,000 so the total credit received by A’s estate is £350,000.

CGS

More recently, the Government has introduced a similar scheme to sit alongside AIL under its Cultural Gifts Scheme (CGS), with the purpose of mitigating liability to income tax, capital gains tax (CGT) or corporation tax. Though it
excludes gifts of land, individuals can receive a 30% agreed value of the object to use against liabilities and companies 20%. The gift itself does not attract a liability to tax.

The CGS gives some interesting opportunities for mitigating tax in the most unlikely of circumstances. High value divorces can result in large CGT bills on a rearrangement of assets and the CGS provides an opportunity to mitigate this
(assuming they all agree). In addition the CGS helps taxpayers save tax now, whilst ultimately gifting assets in their lifetime. Not dissimilar to the tax relief that arises from cash gifts to charity.

How it works

An expert panel considers whether an object put forward for gifting is eligible. On its determination the Arts Council informs HMRC of the identity of the donor and value of the object and the agreed reduction is applied to the taxpayer’s
tax liabilities.

Ultimately it encourages objects of public interest to be made available to the public rather than sold through private sales. The Arts Council reports that donations to the public each year can amount to £40,000,000 and the number of cases put to them has been increasing, year on year, so plenty of scope for gifting.

There are some reasons to be wary however. Much of the success and failure of the schemes falls on the agreed value between the expert panel and the donor’s valuations.

Timing is also a factor. Relying on the AIL may result in an object being put forward that may not be in vogue. Personal Representatives of an estate may be obliged to make hastier applications for AIL in order to administer an estate,
whereas CGS applicants may take a more measured approach and off-set the object value over a number of tax years. And if an estate is contested, then all bets are off!

Both AIL and CGS afford the opportunity for a philanthropic approach to ensuring valuable works of art are donated to the nation which may align with the strategies of next generation wealth transfer. They also offer an enticing look at some of the more eccentric collectors who have amassed interesting and varied works.

Last year a number of works of George Pinto’s collection were offered to the public including Jean-Étienne Liotard’s exceptional work in pastel, The Lavergne Family Breakfast and an unfinished Gainsborough for a staggering £11,541,482. In more recent years, a number of works have been donated by Bloomsbury set participants such as Duncan Grant and Vanessa Bell, many of which are housed in the National Portrait Gallery and offer a tantalising look at the intimate and at times insidious relationships between its principle members.

So the next time you walk past Picasso’s Weeping Woman or a draft of John Lennon’s lyrics, AIL and CGS have done their job in bringing these remarkable works very literally into the public eye.

* A douceur is a tax benefit given to someone who sells a historical artefact to a public collection