Over-inflated assets

The HMRC consultation on gifts of pre-eminent objects and works of art to the nation was published on 29 June in the wake of a Budget announcement. Although included in the ‘charity’ part of the Budget, it does not, strictly speaking, comprise a means to incentivise giving to charity; the proposed scheme would actually require donors to make gifts of eligible objects to the nation, which the government would then lend to suitable organisations for public display. While the donor could nominate a preference for an appropriate home for the object, this would not be binding.

Two-way street

The proposed scheme would run in tandem with the current IHT acceptance in lieu scheme. The two schemes together would, however, be subject to an annual limit on total tax reduction permitted of £20m. (For details of the new proposed scheme for pre-eminent objects see box).

The consultation document poses a number of questions:

• Should the scheme be open to corporate and non-corporate donors as well as individuals? (This would extend the potential pool from which donations may be made, but could mean that the annual limit was reached more quickly, and the nation might lose out on potential gifts.)

• What sort of objects should be eligible? Should eligibility simply mirror the acceptance in lieu ?scheme or should a different criterion be applied?

• Should the scheme operate on a ‘first-come first-served’ basis in any tax year (so that offers made after the £20m cap has been reached cannot qualify in that year), or should all offers have to be made within a certain period in the year and then a decision made for that tax year?

• To what sort of institutions should objects be loaned? What conditions should be attached to the loans? How should public access be assured?

• What percentage of the object’s ?value would be sufficient to encourage donors to make a gift ?to the nation? Should the same rate apply to individuals and to other donors (if permitted under the scheme)? Should the tax reduction on any single object or for a single donor be capped?

The proposal mainly involves policy questions and should not entail significant problems over implementation. The principal complaint it is likely to generate from the philanthropy sector will probably concern the pusillanimous offering of a 25 per cent tax reduction – as opposed to the 100 per cent currently allowed on gifts of land and qualifying shares. Indeed, the consultation fails to address the basis on which fiduciaries, such as trustees or company directors on behalf of companies, could make a gift under the scheme as proposed.

Drawing out

The sector has long campaigned for ?an extension of the asset class against which donors may claim tax relief. HMRC’s response has always been to ?the effect that extending the asset class ?to embrace chattels, including works ?of art, would be too open to abuse because such objects are difficult to value. However, where, as suggested here, a valuation is agreed with a government-appointed panel of experts, it is difficult to see how there could be abuse. Such being the case, there seems every reason to apply the relief to the widest possible class of chattels, allowing a 100 per cent deduction against income tax, so as ?to bring the relief into line with ?those available for quoted securities ?and land gifts.

The eligibility test under the proposed scheme is also open to criticism. The possibility that chattels of dubious worth could be included would best be dealt with by imposing a threshold, not tied to the very high bar of ‘pre-eminence’ but linked instead to the ‘museum quality’ test, applied by the Revenue up until 1998 for chattels in respect of which conditional exemption from inheritance tax was sought.

This would make sense because, if the proposed relief is to have a real chance of materially expanding philanthropy, it needs to extend to a much broader class of assets. To make the class broader still, the relief could embrace the gift of any chattel but, to avoid abuse, if the item were to fall below the museum quality test, income tax relief would only be available if the recipient subsequently converted it into cash, at which stage valuation would be beyond question. All this points towards a simple extension of the current income tax reliefs (for gifts of quoted securities and land to charities) ?to chattels as a simple and ?easy-to-administer alternative to ?the proposed scheme.

Softly, softly

It is understandable in present political and financial/economic circumstances that the government prefers to tread gently in this field and the measures which are the subject of this consultation should be welcomed as far as they go. However, they have been hyped, especially during parliamentary question time, to a level they simply do not warrant. For example, they have been described, together with other reforms announced in the Budget, as representing, “the most radical and generous” reforms to charitable giving “for more than 20 years”. The fact is that the gift aid reforms, initially introduced by the Finance Act 1990, were themselves relatively limited, but they have since been extended very broadly; likewise, the income tax reliefs for gifts to charities of quoted securities and land, introduced several years later, were far more generous and far more radical than anything we have seen ?since May 2010.

In contrast, the credibility of the proposed scheme as an incentive to giving is somewhat undermined due to its distinctly non-radical nature and, in particular, the relative paucity of the tax break offered. It is therefore hard to see why those who may pay little or no income tax or CGT would hand over a valuable asset against 25 per cent tax relief, rather than leave it by will, thereby saving a 40 per cent IHT charge.

Simon Weil is a private wealth partner at Bircham Dyson Bell