With the continued freeze of the Inheritance Tax (IHT) nil rate band set to continue for a few more years (£325,000 until April 2021 at least) now is the time to make sure that all other reliefs and exemptions are fully explored. One of these is the little known but potentially very useful exemption known as the “conditional exemption”.
The exemption offers a gateway for qualifying property to pass through generations without having to pay an IHT bill.
This was introduced by the Government to preserve property that is considered important to the nation’s cultural heritage for public benefit, while allowing for private ownership to be retained. The key benefit for families is that ownership of property and land as well as movable items (chattels) can pass from generation to generation in a family without having to sell up to settle IHT. However, as indicated by the name, this is a conditional exemption and therefore there are several conditions to be met.
What property qualifies?
The conditional exemption applies to ‘heritage property’ – buildings and other assets that have pre-eminent national, scientific, historic or artistic importance. To be specific, heritage property in the land and buildings context must be one of the following:
- land of outstanding historic, scenic or scientific interest;
- buildings of outstanding historic or architectural beauty or interest;
- land considered essential for the protection of the character and amenities of such buildings; or
- objects historically associated with such buildings (for at least 50 years).
Heritage property also extends to any object or collection of objects (pictures, prints, books, manuscripts, works of art or scientific objects), that is/are considered to be pre-eminent in its own right. Please refer to our earlier Blog piece IHT & Chattels https://src-time.co.uk/inheritance-tax-and-chattels/ for more information about IHT on chattels.
How does it work and what is the tax benefit?
The exemption must be claimed and if the heritage property meets the criteria, specific undertakings are given to HMRC, including: allowing public access, retaining the property in the UK; and preserving and maintaining the property.
As mentioned above, there must be some form of open access, usually in the form of the owner’s house being open to the public. The exact amount of time for which this access will be required is a question of negotiation with HMRC although access for 25 to 30 days per year is not uncommon.
Public access may also be provided by a loan of the work of art to a local gallery or museum. The owner may negotiate to lend for one month a year or for three months every three years. It is often a significant challenge finding a gallery which is willing to borrow the work of art, quite apart from the costs and risks of transporting the item and insuring it throughout.
The undertaking to secure public access includes publishing details of the work of art. Details will be included on HMRC’s website although it is usually possible to maintain some privacy or use a solicitor’s address (or other) as the first point of contact.
In return, an exemption from IHT is granted, conditional upon fulfilling the undertakings agreed. The exemption works as a deferral of an IHT charge that would otherwise be due on transfers of qualifying property on death, on lifetime transfers of property if the donor dies within seven years, or on gifts to trust.
The relief also extends to Capital Gains Tax (CGT) that could arise in the case of a lifetime gift or transfer to a trust. Similar to IHT, the relief must be claimed.
How do you claim?
An application is made to HMRC within two years of (1) the gift of the property to trust, (2) the donor’s death for failed gifts, and (3) transfers on death to the beneficiaries of the deceased’s estate. HMRC may allow for a longer period in certain circumstances.
HMRC will involve an appropriate advisory body for guidance on whether or not the property meets the criteria. If it does, then negotiations will begin over the terms of the undertakings. The undertaking can be renewed if the property changes hands.
Breach of undertakings
HMRC will monitor undertakings by writing to owners every five years for confirmation that all the conditionally exempted chattels are still present.
On a material breach of undertaking, such as the failure to allow public access or if the property is sold, IHT (and CGT if relevant) will become due on the current value of the conditionally exempt property.
SRC-Time are one of the South East’s leading accountancy firms in advising individuals and businesses in all aspects of their accounting and tax affairs and we are able to assist in any issue raised above.
Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at firstname.lastname@example.org or speak with an account manager to get any process started.