Policy paper

Estates Duty and Inheritance Tax: objects granted exemption from Estate Duty

Published 16 March 2016

Who is likely to be affected

Owners of objects which have a legacy exemption from Estate Duty on the grounds of their national, scientific, historic or artistic interest. Estate Duty is a forerunner to the current Inheritance Tax (IHT).

General description of the measure

This measure makes 3 changes:

• to stop the ability to use existing statutory provisions which allow IHT to be paid, at a lower rate than Estate Duty would be payable, where a charge arises following a death - the measure will change the current position so that it aligns with the position for lifetime transfers, where HM Revenue and Customs (HMRC) can elect for either IHT or Estate Duty to be paid
• to create a charge on objects which are currently subject to an Estate Duty exemption and which have been lost, but will not include a loss which the Commissioners are satisfied was outside the owner’s control
• to bring back within scope certain public galleries and museums who benefitted from the favourable tax exemptions under Schedule 3 to Inheritance Tax Act (IHTA) 1984 on the grounds that they were maintained by a local authority but are currently unable to do so because of their status as independent charitable trusts. It will also transfer the current power to add new national institutions to Schedule 3 from HMRC to HM Treasury

Policy objective

This measure will correct a few technical issues with the current legislative framework to ensure that the scheme works in line with the publicly stated policy.

Background to the measure

IHT was introduced in 1984. It replaced Capital Transfer Tax, which replaced Estate Duty in 1975. The current IHT legislation contains a scheme designed to protect certain assets which are considered to be of national importance, and prevent them from being sold off to meet an estate’s IHT liabilities.

The relief is available for either IHT or Capital Gains Tax (CGT), and allows the charge to be deferred providing certain conditions are met (these include maintaining the object in a good condition, having the object open for the public to view, and to display the object without prior appointment for a number of days each year). If any of the conditions are breached, or the asset is sold, tax becomes payable. A few legacy Estate Duty legislative provisions still remain in force in relation to exemptions given pre-March 1975 and govern the interaction between Estate Duty and Conditional Exemption.

This measure was announced at Budget 2016. There has been no previous consultation on this measure.

Detailed proposal

Operative date

The provision to stop the ability to pay IHT, at a lower rate than Estate Duty would be payable where a charge arises following a death will have effect in relation to a chargeable event occurring on or after 16 March 2016. The Estate Duty charge for items which have been lost, and the provisions to bring back within scope of existing legislation galleries and museums who used to benefit from favourable tax exemptions will have effect on and after the date of Royal Assent to Finance Bill 2016.

Current law

Change to charging provisions

In cases where exemption from Estate Duty has been granted under the provisions of section 40 of Finance Act (FA) 1930, the exemption remains in place until the object is sold (section 40 (2) of FA 1930). Where Conditional Exemption from an IHT charge is granted upon a charge arising on a death then the earlier Estate Duty exemption becomes absolute and on a subsequent sale IHT is chargeable (Schedule 6 Paragraph 4(2) (b) of IHTA). If however, Conditional Exemption is granted on a lifetime transfer the Estate Duty exemption runs in tandem with that granted from IHT (Schedule 6 Paragraph 4(2) (a) of IHTA). Upon a sale HMRC then have the choice of which charge to raise.

Raising a charge for an Estate Duty item that has been lost

Under the provisions of section 40 (2) of FA 1930, exemption for objects to which that section applies lasts until the objects are sold. There is currently no legislation in place to determine a charge when the owner of an Estate Duty exempt object loses it. The loss of an object is dealt with under the IHTA regime by section 32(2) IHTA 1984 which allows for a charge on loss due to negligence.

Schedule 3 to IHTA

In order to encourage gifts to public collections Schedule 3 of IHTA includes a list of bodies to whom gifts are exempt from IHT (section 25 IHTA 1984) and CGT (section 257 Taxation of Capital Gains Act). Treasury functions include the power to be able to add further public bodies to Schedule 3 under section 95 (1) of FA 1985 transferred to the Commissioners of Inland Revenue (‘the Board’) from July 1985.

Proposed revisions

Change to charging provisions

Legislation will be included in Finance Bill 2016 to amend paragraph 4(2) (a) Schedule 6 to IHTA so that upon a sale HMRC will then have the choice of which charge to raise. This proposed change will bring the position for deaths in line with the tax position for lifetime transfers.

Raising a charge for an Estate Duty item that has been lost

Legislation will be introduced in Finance Bill 2016 to amend section 40 (2) of FA 1930 create a charge on objects which are currently subject to an Estate Duty exemption and which have been lost, but will not include a loss which the Commissioners are satisfied was outside the owner’s control.

Schedule 3 to IHTA

Schedule 3 to IHTA will be amended to bring back within scope of existing legislation public museums and galleries that previously benefitted from the advantageous tax provisions currently provided by the IHT legislation, but have lost this benefit because some local authorities have placed their museum’s collection into independent charitable trusts which are not within the terms of the legislation. Section 95(1) of FA 1985 will also be amended so that the power to add further national institutions to Schedule 3 will be transferred to the Treasury.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
negligible	negligible	negligible	negligible	negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will affect around 2,000 individuals who are owners of objects which have been given exemption from Estate Duty. The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

HMRC does not hold data on the protected characteristics of all those potentially affected but this measure should not have an impact on any of those groups sharing protected characteristics.

Impact on business including civil society organisations

The measure is not expected to have any administrative impact on customers, however we expect negligible one-off costs to organisations and businesses who will need to familiarise themselves with the new legislation.

Operational impact (£m) (HMRC or other)

There will be no significant additional operational impacts from this legislative change.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through communication with affected taxpayer groups to ensure the legislation operates as intended.

Further advice

If you have any questions about this change, please contact the Assets and Residence Policy Team on Telephone: 03000 558 551 or email: Ihtandtrustsconsult.car@hmrc.gsi.gov.uk.