It was recently reported that the National Gallery has acquired three 18th century artworks in lieu of approximately £10 million of inheritance tax on the estate of city banker, George Pinto, 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), depicts an intimate moment between a mother and a child and is considered to be a masterpiece of Liotard's oeuvre. The value of this artwork is demonstrated by the settlement of £8.7 million in inheritance tax against it. The Gainsborough portrait settles £1.1m of tax, and the third work, Thomas Lawrence's portrait of the Hon Peniston Lamb (c. 1790), settles £146,000.
The artworks were acquired under the Acceptance in Lieu scheme (AIL). Broadly speaking, this scheme enables inheritance tax, which would be payable on the basis of the value of a deceased person's estate, to be paid by transferring ownership of significant cultural heritage to the nation. AIL may also be applied to other forms of tax, such as capital gains or VAT. The types of cultural heritage that can be accepted in lieu of tax includes: i) land of scenic, historic or scientific interest, ii) buildings of outstanding historical or architectural interest, and iii) objects that are preeminent for their national, scientific, historic or artistic interest. In an era marked by public spending cuts – which are only set to continue in the current climate – this scheme enables the UK's charities and museums to acquire culturally significant land, buildings and objects that they may not be able to otherwise.
AIL enables the tax payer to mitigate tax exposure: put simply, the property accepted substitutes for an amount of tax due at a "special price", represented by its agreed net market value after the deduction of inheritance tax, plus a so-called "douceur" (sweetener). This douceur is a percentage of the value of the notional inheritance tax - 25% in the case of an object, and 10% in the case of land and buildings. By way of example, if an object worth £100,000 is offered, its net open market value would be, after the notional inheritance tax of £40,000 is deducted, £60,000. The douceur of £10,000 (25% of £40,000) would be added to this value, meaning that the object is sold by the estate to the nation for £70,000 – a 17% higher value than if it were sold on the open market and the inheritance tax had to be paid. The AIL scheme also enables the nation to obtain objects and land of cultural importance for less than the open market value.
Whilst the AIL scheme may appear to be a win-win for the nation and taxpayer, executors intending to utilise the scheme need to be aware of a range of issues. For example, one of the key considerations is the valuation of the item on which AIL will be calculated. This will entail obtaining the opinion of at least one independent expert and negotiating the basis of the settlement with the institution which has expressed an interest in acquiring the object. In addition, executors may wish to consider appointing an expert to assist in negotiations with the institution. If so, then they should ensure that all parties are clear in relation to the terms on which the expert is acting, including the extent of their authority to act on the executors' behalf and the basis of their fee.
Executors should also be aware of issues which may arise from the estate. For example, a residuary beneficiary may have set her heart on inheriting a particular piece of art from the estate, notwithstanding the potential tax disadvantages of her doing so. Furthermore the land that the executors of the estate intend to offer in lieu under the scheme, may have been promised by the deceased to another person, which was relied on by that person to their detriment, activating the doctrine of "proprietary estoppel". This may enable this land to pass outside of the deceased's person Will, meaning that it could not be given in lieu.
For any executors wishing to utilise the AIL scheme, it is important that they perform due diligence on the artwork in question and are confident on the title position. Too often, our Art Law and Private Wealth Dispute teams are called in to assist clients further along in the process, where a costly dispute could have been avoided - either acting for third-party claimant or helping executors defend a claim from a third-party who claims they are in fact entitled to the object, land or building that the executors intend to offer in lieu. It can therefore be helpful to seek guidance at an early stage as disputes can be both costly and damaging to reputation if the matter becomes public.