Acceptance in lieu offers a different route to handling UK inheritance tax liabilities.

The following article is from Olivia Meekin (pictured below), a partner in the Private Wealth team at the law firm Bishop & Sewell. The editors are pleased to share this content; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com.

Olivia Meekin

“The truth is, if old Major Dover hadn’t dropped dead at Taunton races, Jim would never have come to Thursgood’s at all.”

The opening lines from John le Carre’s 1974 best seller Tinker, Tailor, Soldier, Spy that confirmed a stellar career as one of the UK’s best-loved spy fiction writers with a string of films and TV adaptations that even now continue to follow.

Like every good spy, John le Carre was the pen name for David John Moore Cornwell, who having passed away six years ago left a valuable archive of more than 900 boxes of papers and manuscripts. 

His children have saved a £1.5 million ($2.0 million) potential inheritance tax bill by having his archive classified as ‘cultural heritage’ and donating it to the nation via the acceptance-in-lieu scheme.

Today, inheritance tax (IHT) hangs heavily over the estates that exceed £1 million. For some, IHT liabilities can quickly soar thanks in part to April’s planned changes to the agricultural and business property reliefs. 

The acceptance in lieu (AiL) scheme offers a distinctively different route. Where an estate includes assets, land or property that are considered “culturally significant,” these can be “gifted” to the nation in settlement of IHT with the benefit of a 25 per cent “douceur” or uplift on the tax saving to encourage the retention of these items for the benefit of the nation. 

To qualify, the items must:

--  Be objects or collections of national, historic or scientific interest; 
--  Land of outstanding scenic, historic or scientific interest; or 
--  Buildings that require preservation on the grounds of their historic or architectural interest.

Objects that qualify are varied and can include literary works, such as those created by John le Carre, paintings and drawings, sculpture, pottery, furniture, buildings and even gardens. National interest is widely defined and increasingly means of local interest too. An item that might not be of interest to, for example, the V&A in London may well be of interest to a regional museum and still qualify.

A register and annual report from the Arts Council lists successful acceptance-in-lieu cases and a register of those assets donated to the country. It can be viewed here. 

For an item to be considered, its owners or the executors of an estate must first gain a professional valuation of the asset and explain why it merits acceptance. A special AIL panel, managed and chaired by the Arts Council, will review the application and agree, or not, on its merit and value.

If an item is accepted, HMRC will apply an incentive, called a douceur, effectively increasing the tax credit claimed and the value of the item by 17 per cent. For example, if an estate does not opt to participate in the AiL scheme and instead sells the items into order to settle the inheritance tax liability, then the money in the beneficiaries’ hands would be as follows:

Taxable value              £100,000
Less
IHT @ 40 per cent        £40,000)
Net value to estate       £60,000

However, if an item is accepted for the AIL scheme, then HMRC will refund 25 per cent of the IHT due on that item, meaning that the estate benefits from a larger share of the item’s value than if it had been sold.

Taxable value                  £100,000
Less
IHT@ 40 per cent           (£40,000)
Plus
Douceur                          £10,000
Credit against IHT liability    £70,000 

It should be noted that if the tax credit is greater than the estate’s overall IHT liability, HMRC will not refund the difference.

There are, however, reasons for caution. 

The value of items will vary over time reflecting the tastes of museum buyers. Timing is therefore critical. Unlike the Conditional Exemption Scheme where donors can continue to benefit from the use of the asset, items accepted by the AIL scheme will fall out of the donor’s control and ownership forever. It should also be noted that where an estate or asset is contested, the AIL scheme will not be available. Care should also be taken when drafting a will to ensure that its provisions do not accidentally exclude the estate from qualifying for the AiL scheme. Professional advice should therefore always be sought to ensure that both the will and any other lifetime arrangements are structured appropriately.

For some estates, AiL offers that rare opportunity to preserve heritage whilst easing the IHT burden.