Tax relief on heritage assets: Am I eligible?

On the transfer of national heritage property to a new owner, exemption from IHT and CGT is available, subject to a range of conditions.  

Primarily, the property must be of a type that qualifies for the exemption: e.g. buildings of outstanding historic or architectural interest and their surrounding land, other land of outstanding scenic, historic or scientific interest, and objects (or collections of objects) which appear to be pre-eminent for their national, scientific, historic or artistic interest.

The tax exemption must be claimed, normally, within two years of the transfer. The asset will then need to be assessed by the relevant government heritage advisory agency who will advise HMRC, in order to determine whether exemption applies. There is no provision to appeal against a decision where an exemption is denied.

The new owner must undertake to look after the property in the UK and secure reasonable access to the public, including access without a prior appointment for a certain number of days. If the property is transferred again (other than by sale) the new owner can replace the undertaking to retain the exemption. HMRC will check every five years that the undertakings are being adhered to.

This exemption is lost where there is a material breach of the undertaking. An example might be that the qualifying asset is sold (other than to an exempt body or HMRC), or the owner to whom the conditional exemption has been granted dies. When the conditional exemption is lost, the IHT/CGT reliefs are clawed back.

Example 

Mr A gives a painting by a famous 18th century painter to his nephew. The painting was granted conditional exemption status after Mr A inherited it from his father. The nephew agrees to adhere to the undertakings initially agreed by Mr A and HMRC. However, following a disastrous business venture, the nephew needs to raise capital and arranges to sell the painting to a third party who will take the painting to the USA, where he lives. This transaction will create a recapture charge and IHT and CGT will become payable.

Trustees can also apply for conditional exemption where a settlement holds an asset which qualifies. The conditions are substantially the same as for an individual. When a trustee retires, the new trustees take on the existing undertaking and do not have to reapply, but when the asset is appointed to a beneficiary, the beneficiary will have to enter into a new undertaking with HMRC for the exemptions to continue. 

The exemption is unconditional (absolute) for a gift or sale by private treaty, to certain public bodies, or on acceptance of the property in lieu of IHT.  

Under a private treaty sale to an approved body (e.g. the National Trust, a public museum, or an art gallery), the buyer and seller agree a value, which is then discounted by the amount of tax that would have been payable on a ‘public’ (non-exempt) sale. Finally, the parties add a fraction of the notional tax, which is usually 25% for an object, to the sale price, resulting in a special price which the seller receives. The purchasing body pays the full ‘public’ value less 75% of the notional tax, so that the benefit of the tax exemption is shared in the ratio 1:3.   

Acceptance in lieu of IHT entails the offer of heritage property, instead of cash, in full or part payment of the tax. The benefit of the exemption is again shared, but this time between the former owner and HMRC. Although HMRC ‘accepts’ the property, it does not retain ownership. Rather, the Culture Secretary makes a direction passing ownership to a suitable public body. 

At first glance, applying for conditional exemption status may appear to be a solution to a hefty tax bill but the onerous conditions and potential clawback in the event of a breach means that it is not a panacea. It is important to consider this decision carefully – engaging professional advice is crucial to ensure that this is the right decision for you and your tax situation. 

If you own an asset that could be considered national heritage, get in touch with our experts for professional tax advice tailored to your unique circumstances. Please fill out the form below and we’ll be in touch to discuss your requirements and how we can help.