The art of gifting and gifting of art

The art of gifting and gifting of art

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

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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.