The papers have reported recently that over £1 million worth of Inheritance tax (IHT) due on the late Prime Minister, Margaret Thatcher’s, estate has been settled by the donation of her papers to the nation. The collection reputedly includes her handwritten memoir of the Falklands War.
Thatcher’s executors will have donated the papers under the Acceptance in Lieu (AIL) scheme administered by the Arts Council which enables pre-eminent objects such as works of art, manuscripts, heritage objects and historic documents to be donated to the nation as payment (in full or part) of an estate’s IHT liability.
In order to be classed as “pre-eminent” the item in question must be of particular historic, artistic, scientific or local significance, either individually or as part of a collection. In 2013/14, items with a value of over £269 million were donated with the tax settled amounting to over £167 million. This included, however, items donated under the recently introduced Cultural Gifts Scheme which enables UK taxpayers to obtain a tax reduction during their lifetimes in return for donating items to the nation. The AIL scheme applies on death and is a long-standing scheme originally introduced at the beginning of the 20th century.
Although many of the items donated recently are paintings, porcelain, a set of political posters and a 17th century leather coat were all accepted during 2013/14 by the AIL panel. A particular advantage for the taxpayer’s estate is that, under the terms of the AIL scheme, the object in question will be worth 17% more if offered under the scheme than if sold on the open market. This is because of the “douceur” offered under the scheme whereby 25% of the IHT that would have been payable is remitted to the estate.
If an estate donated a painting with an accepted value of £300,000, for example, if sold on the open market the estate would pay IHT of £120,000 on the painting and receive net proceeds of £ 180,000. If offered under the AIL scheme, the painting’s value would not be brought into account in calculating the estate’s IHT bill and in addition the tax bill would be reduced by £30,000 (25% of the IHT otherwise due) making the value of the painting to the estate, £210,000. This is clearly a good incentive, particularly given that these items will be valuable by their very nature, and is worth consideration by the executors of an estate that might contain items of this nature.