An unusual feature of the UK tax regime with which many not be familiar is the ability for a UK taxpayer to settle an inheritance tax (“IHT”) liability by asking HMRC to accept, in lieu of the tax, the donation of a “pre-eminent” item (something of particular historic, artistic, scientific or local significance). The scheme has operated for many decades, dating back to the late 19th century, and subsequently the Finance Act of 1910.

In short, the scheme allows the Executors of a deceased person’s estate to pay the IHT liability arising on death by transferring ownership of items of cultural heritage into public ownership. The intention is to prevent estates being forced to sell items with such cultural value to private buyers, and therefore keep such items in the public ownership.

The scheme is not used regularly (a handful of estates each year), and each case is handled individually on its facts. Offers are made to HMRC and a panel decides whether the item qualifies, and if so – its value. If accepted (by the Secretary of State for Digital, Culture, Media and Sport, on the recommendation of the panel), the object is allocated to a museum or gallery (or some other public institution). The value credited to IHT is the value of the item, less the IHT payable.

A “douceur” is then added to the net value (10% of the IHT liability on the item/asset for land, or 25% for other assets). The idea is to incentivise taxpayers to use the scheme rather than sell – and hence an object offered in lieu of tax normally results in a bigger reduction of the IHT liability than would be achieved if the Executors sold privately.

Whilst this seems to create a favourable result for the taxpayer (and indeed the nation), there are some practical difficulties. The item will need to be valued – and that value negotiated – and there will inevitably be professional fees to pay. Of course, some beneficiaries may expect to receive a particular item, and using an item to pay IHT may cause some disappointment (or disagreement!)

In the last year, £64,500,000 donations of assets resulted in £40,000,000 credited against IHT liabilities – a record amount.

An alternative scheme – “The Cultural Gifts Scheme” - also operates alongside the acceptance in lieu provisions. This was introduced far more recently, by the Finance Act 2012. Under the scheme, taxpayers can offer a pre-eminent object (but not land) to the nation. An expert panel will consider if the object is eligible/acceptable, negotiate the value with the taxpayer, and make a recommendation to the relevant Government minister.

The taxpayer then receives a reduced liability to income tax, capital gains tax or corporation tax of 30% of the agreed value (for individuals) or 20% (for companies).