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The Art of Giving

The arts world has long been calling for tax reforms to support the Government's "big society" agenda and its aims to encourage philanthropy. The Chancellor of the Exchequer, George Osborne, answered these calls in his Budget in March this year with what he called "the most radical and most generous reforms to charitable giving for more than 20 years".

The centrepiece of the measures announced was a new proposal to apply a reduced rate of inheritance tax to the estates of deceased individuals who leave 10% or more of their net estate (after deducting exemptions, reliefs and the nil rate band) to charity. The Chancellor said he wanted it to become the norm that people leave 10% of their assets to charity and, to encourage this, he will reduce the inheritance tax on the estates of those who do from 40% to 36%. The Government will consult on the detailed implementation of this measure before the summer, but the new rate will apply on deaths occurring on or after 6 April 2012.

A sweeping change to inheritance tax it certainly is not and, in the face of increasing demands for the simplification of tax laws, this is really yet another complication. But is it of any benefit? There are growing numbers of wealthy people who are concerned about leaving too much to their children and the relief is undoubtedly a boon for anyone already planning to give away 10% or thereabouts of their estate to charity, as it will mean a reduced tax bill which will lessen the effect on the other beneficiaries. However, in an average case, a decision to give away 10% will still mean that family or friends who were due to benefit would inevitably lose some of their inheritance.

Gifts of Art

No legislation is in place yet but it seems entirely feasible that, rather than just leaving cash to charity, a work of art could be donated to a museum or gallery and such a legacy would count towards the 10%. In terms of value, one assumes that an open market sale value would apply as is currently the case on death. Of course whenever tax is in question HMRC's valuation experts may have some entrenched views.

The question will be whether this measure encourages a deferral of giving were the inheritance tax savings to outweigh the tax advantages of lifetime giving? If so it would run against other measures unveiled recently by the Government to encourage private giving to the arts, such as a consultation over the summer on tax breaks for people who make lifetime donations of pre-eminent works of art or historical artefacts to the nation, and an £80m scheme to match private donations with public funds.

There are also some already well established inheritance tax planning tools for works of art. The Gift & Leaseback scheme in particular has proved popular because it allows owners to "give away" an art collection but continue to use it. The owner would give the collection to, for example, his child and then pay the child a market rent for continued use of it. The argument follows that the parent cannot be said to have reserved a benefit in the collection because a market rent is being paid for the privilege of enjoying it. Such tax planning means that the art collection will fall out of account for inheritance tax purposes if the owner lives for seven years after the gift, but the arrangement will require payment of a market rent each year on which income tax will be payable by the child. The tax advantages of such planning therefore depend on a number of factors, including the value of the collection itself.

The Government may yet need to revisit its plans to encourage greater private giving to the arts.

This article by Fiona Graham first appeared in the July 2011 edition of Arts Industry.

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