Gift exchange

  • Author : Wendy Philips
  • Date : April 2012
ABOUT THE AUTHOR: Wendy Philips TEP is Senior Director and Head of Tax and Heritage at Sotheby’s in London

The Goodison Review1 recommended introducing a lifetime tax relief for gifts of pre-eminent objects to UK institutions in 2004. There were other forms of relief relevant to owners of art: the douceur incentive for private treaty sales of qualifying art, and the douceur incentive for offers in lieu of inheritance tax (IHT), not to mention the complex provisions enabling capital taxes on certain objects of national importance to be deferred indefinitely under the conditional exemption code. But nothing offered any tax relief on an outright gift of property during a donor’s lifetime.

The UK lagged behind other countries in this regard. The generous tax reliefs available to lifetime donors in the US are well publicised, but other countries, such as Australia, Canada and France, also had well-established schemes. Finally, eight years on, relief is imminent in the form of the cultural gifts scheme (CGS) or, to use its official title, ‘A scheme for the gifting of pre-eminent and associated objects in exchange for tax reductions’. While it does not go as far as that proposed by Sir Nicholas Goodison in his report, it is a great breakthrough.

The draft legislation for CGS can be found in the consultation draft published on 6 December 2011, to be read alongside the detailed guidance note issued by the Department for Culture, Media and Sport on the same date. While most aspects of CGS are now settled, and the draft legislation has taken into account taxpayer responses to its consultation, which closed last September, further changes may be introduced between now and the enactment of the 2012 Finance Act in March.

Basic principle

The CGS is straightforward in how it works: a taxpayer has an object that qualifies

under the scheme. A value is agreed and the object is transferred to an ‘eligible institution’ for public display. In return, the taxpayer receives a reduction in their tax bill (applicable against income tax and/or capital gains tax/corporation tax) equal to 30 per cent of the agreed value of the object donated (20 per cent in the case of gifts by companies). The process of offering an object, assessing and valuing it, and identifying a suitable recipient will be overseen by Arts Council

England (ACE), and CGS will be implemented, from a practical standpoint, using the same resources and processes as the acceptance in lieu (AIL) scheme – with which it will also share a budget. The total tax reduction given under CGS, and IHT settled under the AIL scheme, in any one tax year cannot exceed GBP30 million.

The standards are high. The object must either be ‘pre-eminent’ or associated with a historic building (in line with the current requirements for objects accepted under the AIL scheme). Objects associated with a historic building only qualify in limited circumstances: the building cannot be in private ownership and, typically, is likely to apply in the case of National Trust properties.

‘The CGS includes arts, books, manuscripts and scientific objects’

The definition of ‘object’ is wide and includes fine and decorative arts, books, manuscripts, scientific items and any object considered to be pre-eminent for its ‘national, scientific, historic or artistic interest’. An object’s importance in a regional context can be taken into account. CGS offers no equivalent to the ‘in situ’ arrangements under the AIL scheme, where an object accepted in lieu can be lent back to the offeror provided it can be suitably displayed.

CGS is available to individuals and corporations, but joint owners, trustees and personal representatives are excluded. The exclusion of joint owners is particularly unfortunate as it would prevent, for example, a husband and wife using the scheme in respect of a jointly owned work of art. The reason for this may be the perceived complications that can arise with multiple owners and their different tax situations, but it is hoped that this area might be improved upon between now and enactment of the Bill.

The valuation basis is crucial for the donor because the tax reduction will be based on the agreed value. The guidance notes specify the value should be its ‘fair market price’, which means the price at which the object would be expected to change hands in the open market. The benchmarks the panel are likely to look at are prices achieved for similar objects in the auction room, and it will be necessary to back up any valuations with convincing comparable evidence.

While the AIL scheme requires objects to be valued on a similar open-market-value basis, it does permit a ‘buyer’s premium’ to be added to the offer price, which can increase the value by about 20 per cent. No such buyer’s premium appears to be permitted in the CGS valuation process. The rationale for this distinction seems to be that under the AIL scheme the nation is effectively buying the object, so it is considered appropriate to include a buyer’s premium element. This is not the case under the CGS because the object is being given, not sold.

Allocation has clearly been a tricky issue for the government. Ideally, any donor would like to be able to specify to which ‘eligible institution’ an object should be transferred. However, it is understood that it would create problems under EU law if the donor was able to make any gift conditional upon allocation to a specific institution. The guidance therefore states that the donor may express a wish for allocation to a particular institution and such wishes will be taken into account, though they will not be binding. In practice, it may be sensible to have an initial discussion with ACE about allocation preferences to gauge whether the donor’s preference is likely to find favour.

But what constitutes an ‘eligible institution’? The definition follows the one in the National Heritage Act 1980 for the AIL scheme, and broadly encompasses all museums, galleries and libraries as well as other bodies (the National Trust comes to mind) that include, among their purposes, the preservation of amenities to be enjoyed by the public. Again, in line with the AIL rules, the institution must be able to put the object on public display for at least 100 days a year, and an object received under the CGS can never be sold by the recipient institution.

Tax reduction

The original proposal was that the tax reduction should be 25 per cent of the value of the object offered, and that it could not be carried forward to future tax years if the donor’s tax liability for the year in which the object was donated was less than the tax reduction available. Following consultation, the tax reduction has now been increased to 30 per cent (although it is set at 20 per cent for corporations), and the amount of the tax reduction can be carried forward over a total of five tax years.

‘Assuming a 40 per cent iht rate, donations of exempt property will be attractive’

The guidance sets out in detail the rules for the carry-forward option, which include an obligation to specify the amount of tax reduction to be taken in subsequent tax years, with no ability to adjust those amounts. But there are worrying gaps. What would happen, for example, if the donor dies before all the tax reduction has been used?

While the donation of the object itself will be exempt from both CGT and IHT, there was concern about the impact on property donated that had previously been conditionally exempted from IHT. Could the donation trigger that deferred tax charge? The draft legislation provides that there will be no charge to tax on the donation in respect of the earlier exemption. This means, assuming a 40 per cent IHT rate, that donations of exempt property will be an attractive prospect, as any sale in the open market could attract a total combined tax bill of well over 50 per cent of the value of the object sold.

However, this ‘amnesty’ does not apply where objects have been exempted from estate duty, the rationale being that a taxpayer should not find themselves in a better financial position donating an object exempted from estate duty (if the rate was 60 per cent or more) than if they sold the object on the open market. It would be fairer if this restriction only applied to the extent that the relevant estate duty rate exceeded the IHT rate, and it is hoped the final legislation can be improved.

It would be churlish not to welcome CGS. It is good news for cash-strapped UK museums and galleries, and it should encourage philanthropy. However, it is a very different creature from other forms of gift aid, in particular that for cash, shares and land where the value of the relief is linked to the marginal tax rate of the donor. Sharing the AIL budget could also prove to be awkward (and may deter users of both schemes if they feel there is an uncertainty as to whether the pot has available funds) and the government will need to be scrupulous in ensuring that the first come, first served allocation is adhered to. Only time will tell if CGS proves to be a hit with taxpayers.

‘Securing the Best for our Museums: Private Giving and Government Support’, Goodison Review, Nicholas Goodison, January 2004


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