The National Gallery has acquired a trio of 18th century artworks in lieu of approximately £10m of inheritance tax, including a pastel by Jean-Étienne Liotard and a portrait by Thomas Gainsborough of his daughter Margaret (c.1777). The Liotard pastel, entitled ‘The Lavergne Family Breakfast’ (1754), had already been on loan to the National Gallery and has now settled £8.7m of inheritance tax on the estate of the late city banker, George Pinto.
The artworks were acquired under the inheritance tax ‘Acceptance in Lieu’ scheme (‘AIL’), which provides a means for private property to come into public ownership at no direct cost to the museum or gallery which becomes the new owner. The AIL scheme enables inheritance tax on donated objects (and any other chargeable assets in a deceased’s estate) to be satisfied by the transfer of objects of significant cultural heritage to the nation, rather than the donor paying the tax by cash or cheque. Objects offered under the AIL scheme must be pre-eminent and in acceptable condition. Pre-eminence is determined by national, scientific, historic or artistic interest. An object can also be associated with an important historic building in public ownership. It is also possible to offer land and buildings which are important to the national heritage.
Offers in lieu are submitted to HM Revenue and Customs, assessed by the Acceptance in Lieu Panel (‘AILP’) of the Arts Council before being approved by the Secretary of State for Culture, Media and Sport. The AILP comprises independent experts who seek advice from museum or gallery curators, scholars or members of the art trade.
The scheme is beneficial for the donor, because a greater proportion of the value of the item being offered can be applied to paying the tax bill than if the same item was sold and the proceeds applied to discharge the tax liability. The estate receives not only the full market value of the object, out of which the inheritance tax is paid, but also what is known as a ‘douceur’ or the ‘added sweetener’, in which the government reduces the amount of tax due by 25 per cent. By way of example, if an object worth £100,000 is offered in satisfaction of an inheritance tax liability, its net open market value would be, after the notional inheritance tax of £40,000 on that object is deducted, £60,000. The douceur of £10,000 (25 per cent of £40,000) would be added to this value, meaning the object is transferred by the estate to the nation in satisfaction of £70,000 of inheritance tax liability – a 17% higher value than if it were sold on the open market and the inheritance tax on that object had to be paid. This is the main incentive to tax payers and is seen as an attractive alternative to selling through auction with all the associated costs.
The question of an object’s value is perhaps the most significant issue. According to the AILP, all efforts are made to ensure a fair price is paid, which is based on the market value at the time of the offer. If comparable objects have been sold by auction, or by known private sales, through dealers or agents, then agreeing a value is usually straightforward. The AIL scheme also has a so-called ‘hybrid’ offer in lieu. This concept was invented when Picasso’s ‘Weeping Woman’ from the collection of Sir Roland Penrose was under threat of private sale. The painting’s value would have satisfied more tax than was payable and then, as now, there was no provision for HMRC to accept a part share of an item or offer ‘money back’ to the offeror. As HMRC did not have the power to make up the difference, the solution was for the Tate to pay the difference which it did with the help of funding bodies, such as the Art Fund.
The AIL scheme can be of great benefit when settling inheritance tax, particularly in estates with high tax liabilities and where the beneficiaries are reluctant to assume responsibility for the security, insurance and maintenance of cultural objects that may be offered in lieu of tax. The AIL scheme is also a great way of ensuring that items of considerable historical value do not vanish from public view but are instead acquired for the nation.
Jack Martin is a Solicitor in the Private Client team. Please contact him for further information on the above or to discuss any art related matter.