The motives behind gifting are generally either to help someone out; to keep wealth or an heirloom in the family; to save tax; or any combination of the three. The inheritance tax (IHT) rules around gifting are designed to allow reasonable forward planning and to promote charitable giving, but without allowing excessive so-called “death bed” actions. Naturally assets including works of art are included in the value of an estate for IHT calculation purposes, potentially being subject to up to a 40 per cent tax charge.
And it is not just IHT which needs to be considered. A lifetime gift of an asset or work of art usually creates a charge to capital gains tax (CGT) on the profit, at the point the gift is made. The tax rate depends upon the other taxable income in that year. After allowing for the CGT allowance of £11,100, the gain is added to other taxable income and charged at 18 per cent or 28 per cent. Better tax value than the full fat IHT rate, but still a chunky tax charge to be met from other resources.
Acceptance in lieu
The acceptance in lieu (AIL) scheme is designed as a tax-efficient way to allow gifts of art and important heritage objects to museums or other public ownership. Here the gift of the artefact is made on death and the object’s value is used to meet some or all of the IHT liability, hence the name, acceptance in lieu [of payment of IHT].
A further incentive is that 25 per cent of the IHT levied on the value of the gift is refunded to the estate. AIL can also apply to land and buildings where the IHT incentive is 10 per cent.
Objects gifted must meet certain criteria to be accepted. They must be ‘pre-eminent’ and of particular historic, artistic, scientific or local significance and be in an acceptable condition. They must also pass to an institution where the public will have access to view.
To qualify as an AIL, the gift must be approved by the Secretary of State for Culture, Media and Sport (currently John Whittingdale MP) who is advised by Arts Council England’s AIL Panel, although the initial application is through HMRC.
The Secretary of State then ensures the object passes to a public institution, which offers access to the greatest number of people. Where an object has a link to a specific building such as a National Trust property, it will be transferred to the owner of the building to best match its context, but only if there is sufficient public access.
The tax benefit to the person offering the object is 17 per cent as demonstrated in Box 1.
Gifting assets to charity
An alternative to AIL is to leave or gift the asset or assets to charity. The value of gifts to registered charities is normally free from IHT and CGT. Furthermore, on death, if the total of gifts to registered charities is 10 per cent of the taxable value of the estate or more, in addition to the value of the gifts being exempt from IHT, the rate of IHT payable is reduced by 10 per cent, from 40 per cent to 36 per cent, as outlined in Box 2.
The key point to remember with this planning is that beneficiaries do not receive larger legacies, the tax saving instead works in favour of the receiving charities.
Gifting shares, property or land to charity
There are tax breaks available when gifting shares, property or land to charity, which depend on how the gift is made. These gifts can be highly tax-efficient as they benefit from additional tax reliefs over and above the general IHT exemption. There are two ways in which this can be done during lifetime:
First, a direct gift of the asset. If shares, land or property are gifted to a charity there is no IHT consequence to worry about. Furthermore, there is no CGT to pay on any gains, the charity receives the value of the asset tax-free and there are no tax consequences for the investor. Gifting an asset to charity often works well where there are assets with large, taxable capital gains.
Alternatively, an individual can sell the asset and then gift the cash. If shares, land or property are sold and then the value is gifted, CGT may be payable if the asset has increased in value. However there is a CGT exemption if the charity asks you to sell on their behalf.
Details of this can be found at www.gov.uk/donating-to-charity/donating-land-property-or-shares. Gift Aid should also be available on the value of the money gifted.
Through this scheme, income tax relief of £25 is added to every £100 gift, making a total of £125 for the charity. Higher- and additional-rate taxpayers can reclaim further tax relief via their self-assessment tax codes.
Therefore, selling the asset before gifting the proceeds works well where the capital gain is small, or falls within the annual CGT exemption, or where there are losses which can be offset against other gains, or where the value of the Gift Aid will outweigh any CGT liability.
With all the recent changes to the inheritability of Isas, the improved tax position relating to pension death benefits, the change of tax rate if 10 per cent of a taxable estate is left to charity and the Conservative government pledging action on the nil-rate band, planners should take the opportunity to review investors’ wills and estate plans.
Danny Cox is a certified financial planner and a chartered financial planner at Hargreaves Lansdown
