Back to Basics: Heritage assets

Have you ever wondered how historic estates and national treasures – such as paintings, sculptures or furniture – stay together (perhaps in situ or on loan to museums) from one generation to the next without being sold for the settlement of inheritance tax? If so, then this article may be of interest to you. 

While this question is not one that you will be faced with every week, month or even every year of your career (and, indeed, you may never have to deal with it), it is an interesting area of taxation which is bespoke and niche, and which few practitioners have heard of or would advise on. 

Introduction

The area of taxation that I am introducing you to in this article is that of conditional exemption (CE), which defers the liability to settle capital taxes which would ordinarily apply in respect of pre-eminent assets upon a chargeable event occurring. The assets to which CE may apply are those which are agreed and defined by HM Revenue & Customs (HMRC) as property, land or objects (or a collection of objects) that are pre-eminent and intrinsically connected to the UK’s national heritage. Due to this connection, these assets may be eligible for the deferment of the payment of capital taxes on the proviso that such property, land, objects or collection of objects are able to satisfy the pre-eminent heritage asset test. Additionally, the manner in which that property, land, object or collection of objects is governed complies with conditions, referred to as undertakings, set out and agreed with HMRC. We therefore have the potential for assets to be exempt from capital taxes when they comply with various conditions and, as a result, we may have a successful claim for CE to apply.

In this article, I am focusing predominantly on the deferral of inheritance tax (IHT) under CE but, dependent upon the circumstances of the chargeable event, it is also relevant to the deferral of capital gains tax. The deferral of IHT applies when a charge would usually arise, and this may be where there is a lifetime transfer where the asset has been owned for at least six years, an IHT charge upon death, a lifetime gift, a failed potentially exempt transfer or a 10-year charge. 

Since 1896, the idea of preserving certain assets has been part of government policy to promote a beneficial taxation landscape that enables our national heritage to be maintained and preserved for the benefit of the public, while keeping those assets within private ownership. The policy was initially intended for the protection of historic houses; however, it now has a wider reach to apply to all pre-eminent assets upon events which give rise to a capital taxes liability. This policy has survived changes in government and is one which is broadly supported across the political spectrum. It has been estimated that the amount of deferred capital taxes applicable to assets benefiting from CE is around £1bn. HMRC are the gatekeepers of this protection on behalf of the government and the country. The heritage team at HMRC are a relatively small but highly skilled team in this niche area of tax. 

Qualification

The pre-eminent assets which may apply for CE include:

• buildings of historical or architectural interest;
• land of historic, scenic or scientific interest; and 
• objects and collections of national artistic, historic or scientific interest. 

This is quite a broad range of categories, but central to their qualification is that these assets form an integral and a major part of cultural life in the UK. 

The law relating to CE is set out within the Inheritance Tax Act 1984 (IHTA 1984) and in particular the provisions in section 31. Section 31(1) defines six categories of assets which may qualify for CE:

• (a) any relevant object which appears to HMRC to be pre-eminent for its national, scientific, historic or artistic interest;
• (aa) any collection or group of relevant      objects which, taken as a whole, appears to HMRC to be pre-eminent for its national, scientific, historic or artistic interest
• (b) any land which in the opinion of HMRC is of outstanding scenic or historic or scientific interest;
• (c) any building for the preservation of which steps should, in the opinion of HMRC, be taken by reason of its outstanding historic or architectural interest;
• (d) any area of land which in the opinion of HMRC is essential for the protection of the character and amenities of such a building as is mentioned in paragraph (c);
• (e) any object which in the opinion of HMRC is historically associated with such a building as mentioned in paragraph (c).

If you are ever in the position of considering whether an asset may be of relevance to any of the subsections within section 31(1), then it is for you and your client to decide which category may be relevant; HMRC will not make this determination for you.  

Section 31(1)(a) 

The types of objects that may qualify under this section include paintings, prints, books, manuscripts, works of art or scientific pieces. The references within this classification are wider than chattels insofar as these pieces can be fixed within a property.  

Section 31(1)(aa)

This section is commonly referred to within the context of collections of objects whereby their pre-eminence is based on the collective presentation of the objects.  

Section 31(1)(b)

Land must be of outstanding scenic, historic or scientific interest, but what does this mean? Scenic land will be considered as such if it is outstanding for its scenic interest only. For example, perhaps it’s within a national park, an area of outstanding natural beauty, or a designated landscape. 

Land of scientific interest will be important because of its flora, fauna, geological or physiographical features. It may be that it is a site of special scientific interest, as per section 28 of the Wildlife and Countryside Act 1981. 

Historic land must be of outstanding historic interest and must have a very special historic significance in national or international terms. It might be that the land has an association with a particularly important historic event, such as a battle. It may be that there are earth works or archaeological sites or landscapes that are scheduled ancient monuments, which are clearly eligible for consideration for CE. These types of land will each be considered on their own merits; a checklist for things to hit to achieve CE status does not really exist because of the nature of the bespoke tests and application, which see the heritage team at HMRC deal with each application separately. 

Section 31(1)(c)

In terms of buildings eligible for CE, they must be of outstanding historic or architectural interest. It may be that they already have a listing of grade I or II*, or they are a scheduled monument, but this will not guarantee their conditionally exempt status. HMRC reach out to bodies such as English Heritage and Historic Scotland to advise as to the outstanding nature of any particular building and why it should be preserved for the national benefit and heritage. This does not necessarily mean that only castles, manor houses or stately homes can gain CE. It may be that any building can qualify if it can show it is of outstanding historic or architectural interest.

Section 31(1)(d)

Amenity land to heritage buildings is also incredibly important, as the amenity land may be essential for the property. Amenity land is intrinsically linked to the property and cannot be separated from it without detracting from the heritage aspects of the whole asset. Where the asset falls within subsections 31(1)(b) to 31(1)(e), the owner may wish to set up a maintenance trust fund to provide funding for the maintenance, repair or preservation of the asset and for the provision of reasonable public access.

Section 31(1)(e)

To be designated as historically associated with an outstanding building, the object (or objects) could be something that shares the same historical period as the building. It must also have a close association with a particular building and make a significant contribution to that building, enhancing the appreciation of the building or its history. If an object has been in or associated with a building for less than 50 years, then it is unlikely to qualify as an historically associated object – but again, each case is decided on its own merits and you should not assume that just because something has been there for more than 50 years, that it will automatically qualify for CE. 

Undertakings

So, having considered what types of assets may qualify, it will be relevant to consider what types of duties are imposed within the undertakings which are entered into by the person responsible for the asset, be they an individual, trustees or a company. Whoever is responsible will need to satisfy HMRC that they have the expertise, authority and experience to comply with and deliver the undertakings. 

The public access to view the assets which benefit from the CE is not to be underestimated, as this is a key part of any grant for CE. The public should have reasonable access to the objects concerned – and, indeed, CE will not be granted unless reasonable access is ensured and advertised. The need for public access to be secure is enshrined under section 31(2). HMRC state that public access should be available without prior appointment on at least a minimum number of days each year. In some cases, viewing may be at a public museum or gallery. If plans change and the access by the public is to be amended, this should be done with prior consultation with HMRC. 

How to prepare the application

So, having had an overview of what CE is, what it applies to, the conditions which may apply and the peculiarities in relation to each particular class within the sub-sections of section 31, we now turn to how to make a claim for CE. Like all of the guidance related to CE, the scope of the application will be dictated by the type of asset to which it relates, as the requirements, bodies involved, and methods employed for assessing the asset will vary. I will therefore seek to give you a general overview as to how CE applications are made. 

CE must be claimed; it is not automatically applied. The claim must be made within two years of the chargeable event (although HMRC may have some discretion in exceptional circumstances). It is good practice to observe the two-year rule as you should not seek to rely upon discretion being applied. 

It is important to appreciate that a deferral of capital taxes under CE is not a relief, which, once successfully applied for, lasts forever. Although the CE applies to the assets, it is intrinsically linked to the basis upon which they are held and the ongoing observation of the undertakings which apply to the asset. 

When the assets are held by an individual who has successfully applied for CE in respect of those assets, that CE will need to be reapplied for or renewed upon the death of the individual that holds the assets. Similarly, if those assets are inherited by new beneficiaries and those beneficiaries decide to divide the assets between themselves, then each beneficiary would need to apply to renew that application. Previous success in securing CE does not necessarily guarantee ongoing success, depending on how any change to the holding of the asset affects its heritage value and whether it remains to be of benefit to the public.

This is not a quick process. Your application will not receive an immediate decision due to the complexity of the issues involved and the potential number of external bodies who may be called in to advise and offer guidance to HMRC. External organisations who have specialist knowledge will advise HMRC as to the pre-eminence of assets which have historical, scientific or artistic cultural value. The heritage agencies who advise HMRC include English Heritage, Natural England and the Arts Council. 

The process for initiating a CE application will depend largely on the circumstances in which your claim arises. In some circumstances, this will be a completely new CE application, which will be commenced directly with the heritage team. In other cases, it may be that CE is already in place and the owner who was responsible for compliance with the undertakings has passed away, so you are beginning the process of renewing the CE status through IHT420 as part of the IHT400 submission. 

After you have made the initial contact with the heritage team, they will in most cases ask you to confirm the categories under section 31(1) that your application to. You can then, depending on the nature of the assets, decide which of the sub-sections are relevant to your client’s assets, after which you will be asked by the heritage team to provide particulars in relation to each of those sections justifying the claim under the tests within the legislation. At this stage, you will need to provide very detailed information about the assets and public access to them, including, where relevant, the following:

• Confirm how you will provide and publicise the public access to the asset without prior appointment, on at least 28 days each year during the spring and summer months, and/or at least 100 days of every year with at least 10 days falling on weekends and spring and summer bank holidays.
• Confirm that the owner will authorise HMRC to disclose or publicise information and undertakings relating to the exemption, including details of the agreed public access arrangements. 
• Confirm that there are no present plans to sell the property.
• Confirm that the owner will not, without HMRC’s prior approval, remove from the relevant outstanding building, an object claimed to be historically associated with it.
• Provide digital maps to a specified scale on an Ordnance Survey base. These maps should be clearly marked with the boundaries, public rights of way and the location of any scheduled monuments’ listed buildings, with the scheduled monument reference number, the list, the listing status of each building, the approximate age, construction materials, and any relevant and available plans supporting the historical information. Any other monuments and buildings standing on the land for which exemption is being claimed should also be included, even if this is by way of amenity land to the main asset.
• Provide details of any site listed by any national or regional body that has special scientific, woodland or other environmental interest. 
• Provide details of any nature reserve or woodland.
• If the claim is for essential amenity land, provide details of any outstanding building and additional amenity land over which supportive undertakings are or might be required. 
• Provide details of any land subject to tenancy. 
• Provide up-to-date digital photographs of the exteriors of the outstanding buildings and photographs of all the principal rooms, together with photographs which clearly show the relationship between any essential amenity land (if claimed) and any outstanding buildings, including views to and from the outstanding buildings. 
• Where the claim is for historically associated objects, a full inventory of the assets could be required along with photographs, the position of the items within the outstanding building, the value of the building, and details of any existing maintenance plan for the objects. The inventory may need to be backed up by any past inventory sales catalogues, invoices, estate papers or family history. 
• Confirmation that each object will remain in that building in a room that will be open to the public when the building itself is open. 
• Arrangements and contacts for external advisers to visit the property. The advisers will hopefully already have an existing relationship with the asset owner; however, this is not always the case. 

It is important for the asset owner and their advisers to build productive and positive relationships with the external bodies, as it is these external bodies that not only play a large part in dealing with the success or failure of the CE application, but also may be visiting the property every five years under the administration of the heritage team, to review the status and maintenance of any asset to which CE applies. 

The application to the heritage team needs to be very detailed, as it lays the foundations for a potential lifetime of capital tax deferral and sets the basis for the undertakings, which will be key to the ongoing management of the assets. 

If an application is unsuccessful, the tax will become payable. This will also be the case where there is a failure to comply with an undertaking (known as a material breach) or the asset is sold, and the new owner fails to secure the ongoing status of deferral relating to the asset. 

Other options

I have focused on CE thus far in this article, but there are other heritage tax reliefs in the UK, including: acceptance in lieu, the cultural gifts scheme, private treaty sales, maintenance of historical buildings and gift aid. 

Acceptance in lieu

The acceptance in lieu provisions allow the IHT that is payable to be settled by transferring heritage assets to an approved museum or art institution. This was introduced in 1909 to mitigate the risk of heritage property being sold and permanently lost into private ownership where the only reason for the sale was to settle a tax liability. Heritage assets under these provisions can include objects, land or buildings. 

An offer in lieu will normally be of a greater benefit than an open sale, thus providing another reason for its consideration. For example, imagine an object is valued at £100,000 on the open market and the tax payable on this sale, at 40%, would be £40,000 – the estate of the deceased would receive £60,000. If the object was accepted in lieu, an incentive is added of usually 25% of the tax which would be due. So in this example, the incentive would be £10,000 and the estate receives £70,000 rather than £60,000. For the recipient of the object, such as a museum, the benefit of the scheme is that they acquire the object at no cost. In cases where the value may not meet all of the inheritance tax liability, the museum makes the acquisition at a lower cost than usual. Items can remain in situ in circumstances where the significance of the object is enhanced by being in its location. This may be on a loan basis. 

Once again, we see the importance of the pre-eminence of the items to qualify under the scheme and the terminology of that qualification reflects what we have seen previously including national, scientific, historic or artistic interest alongside assets which are important to the national heritage. The relevant section of the IHTA 1984 is predominantly section 230.  

Cultural gift scheme

The cultural gift scheme was introduced in 2012 and is administered by the Arts Council. This allows individuals to, during their lifetime, donate pre-eminent objects to bodies such as museums for the benefit of the nation, with the aim of offsetting their tax liability. Up to 30% of the value of the object can be set against an income tax or capital gains tax liability in one year, or spread over five years. This scheme is also open to companies whereby up to 20% of the value of the object can be directed to settle tax liability. 

It should be noted that the tax relief available in any one tax year for acceptance in lieu and the cultural gift scheme is not without limits and so the success of an application may depend on timing and availability. 

Private treaty sales

Private treaty sales of pre-eminent works of art to a qualifying public collection can be a favourable option due to the tax-free nature of the transaction. The relevant statute is section 32(4)(a) and section 32A(5)(a) of IHTA 1984. The sale is usually to a national or local museum, gallery or library, and is another way of providing inducement to a seller to proceed in a manner with advice from the Arts Council, which retains the work of art, for example, in the UK for the benefit of the nation.  

Maintenance of historical buildings

The use of maintenance funds has been referred to earlier in this article. Establishing a maintenance fund is an essential method of directing income for the preservation of a pre-eminent and exempt building, for example. The income generating assets which are contributing to the preservation fund can be placed into the maintenance fund, thereby attracting a favourable tax position for the landowner who is usually holding the CE. HMRC can periodically review the maintenance fund accounts to check the level of income received and the purposes of distributions from the fund. 

Gift aid

Most people are familiar with Gift Aid. It is not restricted to heritage assets, but it is a method by which charitable donations attract additional enhancement of 25p for every £1 donated. 

Conclusion

There are several reliefs available in relation to heritage and pre-eminent assets. This article has provided an overview of this complex area. The reliefs and deferral of taxes may have relevance to only the wealthy landed estate owner. 

For solicitors and accountants alike, this is not an area of general practice, nor is it one that even advisers who are used to dealing with the tax exemptions for heritage and pre-eminent assets deal with every day of the week. However, it is an area which certain clients may have the need to consider and, as such, a general awareness is beneficial. For those of you old enough to remember, just imagine the tax savings which could have been made by Del and Rodney when they found their mythical ‘lesser’ watch made by John Harrison in their garage!