Select Committee on Culture, Media and Sport Written Evidence

Memorandum submitted by the Acceptance in Lieu (AIL) Panel


  The Acceptance in Lieu (AIL) Panel advises Ministers in England, Scotland, Wales and Northern Ireland on items offered in lieu of Inheritance Tax under Section 230 of the Inheritance Tax Act 1984. The advice of the Panel is also provided to HM Revenue & Customs.

  To qualify for acceptance in lieu of tax items must be:

    1.  pre-eminent;

    2.  valued at a price which is fair to both offeror and the Nation; and

    3.  in acceptable condition.

  It is the AIL Panel's role to assess whether these three criteria are met.

Once items have been accepted by HM Government, the Panel also advises on where the objects should be allocated.

  In the last five years, the AIL scheme has brought items with a value of £140,000,000 into public collections. It is currently the most important means of acquisition in the UK. Items have been allocated to museums, galleries and public archival depositories throughout the UK and Northern Ireland.


  The AIL Panel wishes to make the following submission:

    The AIL system, whereby works of art, historic material and archives, are offered in satisfaction of death duties (ie Inheritance Tax and any of its earlier forms), is generally felt to be working well at present. It is expected that some 40 cases, with a gross value of £35,000,000, will be concluded during the current financial year, 2005-06.

  There is one area however, that gives the Panel considerable concern. The value of the most outstanding works of art has risen so sharply in recent years that a major painting by Rubens or Rembrandt may well be worth in excess of £40 million. The tax liability of deceased estates is, however, generally well below such a sum. In consequence, if a really important painting is offered in lieu, it will involve a "hybrid" arrangement whereby the value in excess of the tax liability is met by the acquiring museum or gallery through the provision of funds equal to the gap. If, for example, a Picasso is valued at £40 million, with a rate of Inheritance Tax of 40%, the acceptance of the painting could settle up to £28 million of tax. If the actual liability on the estate (excluding the Picasso) is less than £28 million, a hybrid arrangement will be necessary. The tax system permits a range of measures which can be put into place during a person's lifetime to reduce the impact of Inheritance Tax on the estate. An inheritance tax liability on the scale of £28 million is now very rare, given the scope for tax planning that currently exists.

  Even if the liability of the offering estate were to be as high as £10 million, this would still leave the acquiring gallery with the need to raise £18 million (£28 million—£10 million) to secure the painting. This sum is far beyond the purchase grant or acquisition reserves of any UK institution. It is, therefore, highly desirable that additional funds should be made available either through the Heritage Lottery Fund (HLF) or National Heritage Memorial Fund (NHMF) to help such acquisitions. These sources, should, if necessary, be supplemented by special government grants.

  A happy example of this has occurred recently. In 2003, the Trustees of the Sutherland Estates offered a Titian to the Nation in lieu of Inheritance Tax with the condition that it should be allocated to the National Galleries of Scotland. The acceptance of this important painting could have settled up to £14 million of tax. As the actual liability was only £2.4 million the balance of the price was met by a combination of a major grant of £7.6 million from the Heritage Lottery Fund, £0.5 million from the National Arts Collection Fund and a Special Grant of £2.5 million from the Scottish Executive. The National Galleries of Scotland was itself able to raise £1.0 million.

By way of unfortunate contrast, when another Titian, reported to be valued at around £60 million was offered as a private treaty sale to the National Gallery in 2004-05, the proposal was turned down as no funds were available.

  The Waverley Report, half a century ago, at a time of far greater financial stringency, specifically predicted the need for exceptional Treasury grants to support the acquisition of exceptional items which were threatened with export from this country. The Land Fund was the alternative. Since then the Land Fund has been dissolved and the National Heritage Memorial Fund created to act as the fund of last resort for the protection of the UK's heritage. Its effectiveness has, however, been seriously compromised by the inadequate level of funding that it has received in the last few years. Even when in 2007-08 its grant from Government is doubled to £10 million it will not be in a position to assist in more than a handful of cases each year and at the highest levels of the art market, a complete years grant of £10 million is insufficient to provide the UK with the financial strength to compete in a world market.

  The NHMF needs to be adequately funded to ensure that the UK can act effectively in a highly competitive world market for important cultural objects. This would be restoring to the NHMF the role that was originally envisaged when it was established 25 years ago and which it was able to fulfill for the first decade or so of its existence.

  This would enable it to assist:

    1.  with the acquisition and retention in the UK of objects which come onto the market where no tax incentives lower the cost to UK public purchasers; and

    2.  in those situations, such as the hybrid cases of AIL described above, where the tax incentives that already exist need the additional support of cash grants to be effective.

  If the Acceptance in Lieu scheme is to continue to bring into public ownership major works of cultural importance, as it has done in the last 60 years, it will need to be able to call upon the support of grant making bodies in general and the NHMF, in particular, if the value of the scheme is to be maintained.

January 2006

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