Section 20: national heritage property
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
Introduction
Buildings of historic or architectural interest, land of historic, scenic or scientific interest, and objects and collections of national artistic, historic or scientific interest form an integral and major part of the cultural life of this country.
It has been the policy of successive Governments that this national heritage should be conserved and protected for the benefit of the community.
The view has been taken that, so far as possible, property of this kind should remain in private hands and that its owners should be encouraged to retain and care for it and display it to the public. Where this is no longer possible the owners should be encouraged to dispose of it to those bodies in this country which have been set up specifically to hold such property in trust for the community.
In order to conserve the national heritage over the years a succession of fiscal and other measures have been introduced. These commenced with the advent of the Capital Transfer Tax Act in 1975 and were largely consolidated in the Inheritance Tax Act 1984. Further amendments were introduced in the Finance Act 1998. There is also provision for the acceptance of heritage property in satisfaction of Inheritance Tax.
The reliefs which are available to owners of national heritage property include:
a) A chargeable transfer of qualifying national heritage property is conditionally exempt (see paras 20.10 to 20. 19 below) from IHT when formally designated following receipt of undertakings given by an appropriate person (usually the new owner) to preserve the property and allow reasonable public access to it. A breach of the undertakings or a sale of the property will normally lead to a loss of the exemption.
b) Establishment of a Maintenance Fund (see paras 20.20 to 20.29 below) to provide for the maintenance, repair or preservation of the property and for the provision of reasonable public access to it. Exemption can be claimed from the IHT normally payable on the setting up of a trust fund for this purpose. (See s.27 and Sch 4 IHTA 1984).
Despite the tax relief available, owners of heritage property may nevertheless wish, or feel obliged to dispose of the property. In such cases the Government policy is to encourage the owner to do so to a body whose aim is to look after the heritage. Tax reliefs are available in the following circumstances:
a) Offers of property in lieu of tax (see paras 20.30 to 20.39). b) Private treaty sales to certain public bodies (see paras 20.50 to 20.59). c) Gifts to charities.
The assistance of the VOA will be required by HMRC(IHT) in cases involving heritage property where conditional exemption is being applied, where a maintenance fund is proposed, or where property is offered in lieu of IHT.
Normally these cases will be forwarded by CEO DVS but occasionally HMRC(IHT) will issue instructions direct.
Cases involving heritage property should be given a high priority as the valuation requirements are usually complex and the cases are often politically sensitive.
Any difficulties encountered in a case involving heritage property should be referred to CEO DVS.
Conditional Exemption
Transfers of works of art and other national heritage objects, land of outstanding scenic, historic or scientific interest and buildings of outstanding historic or architectural interest together with any eligible land or objects historically associated with the building can be conditionally exempted from IHT under ss.30-35 and 78-79, IHTA 1984 if certain conditions are met.
Conditional exemption from IHT can be claimed in respect of the following transfers:
a) Transfers made on death. b) Lifetime transfers and transfers of settled property chargeable when made (eg into or out of a discretionary trust). c) The ten-yearly charge to tax of assets comprised in discretionary trusts. d) Lifetime transfers to an individual where the transferor reserves a benefit which still subsists at death or which ceases within 7 years of death. e) Potentially exempt transfers (PETs) which become chargeable, i.e. when the transferor dies within the next 7 years.
Claims under “d” and “e” cannot be made until the transfer becomes chargeable on the death of the donor. Uniquely, at “c”, the exemption must be claimed and allowed before the occasion of charge.
Before conditional exemption is given and the claim allowed that the heritage property concerned should be so designated, the property transferred must consist of buildings, works of art, etc, which in the Board’s opinion are of outstanding scenic, historic, scientific, architectural or aesthetic interest. (s.31 IHTA 1984).
The exemption is conditional since tax will be payable immediately a “chargeable event” occurs. A “chargeable event” will occur if the heritage undertakings (which may vary) are broken or the property is sold unless the heritage undertakings are renewed by the new owner.
S.30 IHTA1984 provides that a transfer of value is an exempt transfer insofar as it applies to heritage property. Where only part of a property is granted conditional exemption the entire property should be valued and the resultant figure should then be apportioned on a just and reasonable approach between the value attributable to the heritage property and that attributable to the taxable non-heritage property.
Where within an estate there are several properties some of which are entirely exempt then on first sight there would seem to be no need to value these and they could be ignored. However, if it becomes apparent that a different answer for the taxable property would be arrived at if the exempted property fell to be valued then the latter should be included in the considerations.
Therefore when an estate includes both heritage and non-exempt property, the approach to be adopted is that the whole estate should be valued and this value transferred should then be apportioned between the exempt part and the taxable part, the latter being the figure normally reported to HMRC(IHT). However, occasionally HMRC(IHT) may also require the figure for the exempt heritage property.
Maintenance Fund Properties
Special tax arrangements apply to a settlement established to maintain and preserve qualifying heritage property. The settlement, which is known as a maintenance fund, must be set up for the benefit of:-
a) any land which in the opinion of the Board is of outstanding scenic or historic or scientific interest; b) any building for the preservation of which special steps should in the opinion of the Board be taken by reason of its outstanding historic or architectural interest; c) any area of land which in the opinion of the Board is essential for the protection of the character and amenities of such a building as is mentioned in para b above. (s.31 IHTA 1984 amended by FA 1985 Sch. 26 para 2); d) any object which in the opinion of the Board is historically associated with such a building as is mentioned in para b above.
The outstanding building or land must be designated, just as for conditional exemption from IHT.
The special tax arrangements exempt from IHT the transfer of property to a maintenance fund provided certain conditions are satisfied. The conditions are set out in Schedule 4 Part I IHTA 1984 and in order that the Board may give a direction that the special tax arrangements apply:
a) the property to be included in the settlement must be of an appropriate character and amount; b) the trustees of the settlement must be approved; c) the trusts on which the property is held must provide that during the first six years from the time when the property is put into the fund, or from the time when any property is added to the fund, both the property itself and the income from it may be used only for:
** i.** the maintenance, repair or preservation of the heritage property;
** ii.** making provision for public access to it;
** iii.** the maintenance, repair, preservation or reasonable improvement of the property which has itself been put into the fund; and
** iv.** for defraying the expenses of the trustees.
- The trusts must also provide that for the whole life of the fund the income from the property may be used by the trustees only either for the purposes specified in paragraph c above, or for the benefit of a “National Purposes” body, as defined in the IHTA 1984, or a heritage charity.
Assistance will be required by HMRC(IHT) in assessing the character and amount of property appropriate to the trust (IHTA 1984 Sch 4 para 2(1) (a) (ii)) and in doing so it will be necessary to consider whether the property to be put into trust (the endowment fund) is excessive in relation to the likely costs of maintenance of the heritage property, its amenity land and any endowment land. It should be noted that “amount” refers to the income the property can produce rather than its size.
Advice may therefore be required under the following headings:
- The likely costs of maintaining the heritage property, both in terms of immediate and longer term capital expenditure and annual costs of upkeep.
- The estimated income which the maintenance fund property will be capable of producing. It should be noted that this may exceed the actual income received which could be at an artificially low level for various reasons.
- The income which might be raised by way of service charge levied on tenants of the heritage property. In such cases HMRC(IHT) will normally have already obtained any details and these will be included with the request for advice. If the caseworker becomes aware of any other lettings of the heritage property of which HMRC(IHT) does not appear to be aware, advice should be sought from CEO DVS.
- Whether or not the character of the endowment land is appropriate to the heritage property.
The following examples of qualifying maintenance costs are given for general guidance but each case must depend on individual circumstances:
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Structural repair to the heritage property will normally qualify but structural alterations will do so only in so far as they are necessary to preserve the existing property and are not going further, eg. the provision of a new roof for a house is acceptable but conversion of a wing of a house for private occupation is not acceptable;
-
Running repairs and maintenance costs will normally qualify. These might include:-
** i.** in the case of a building, preservation of the stonework and fabric, internal redecoration and general maintenance. Heating costs will qualify to the extent that they can be shown to be necessary either to maintain or preserve the building or its qualifying contents or as a consequence of public access;
** ii.** in the case of land, items such as clearance, provision of fences and firebreaks, upkeep of ditches and fences and provision of sluices;
** iii.** in the case of gardens, the cost of seeds, plants, materials, implements, the repair and heating costs of greenhouses, and gardeners’ wages; and
** iv.** in the case of historically associated objects, cleaning and restoration of pictures, repairs to tapestries, curtains, carpets, furniture etc.
- Expenditure on the provision of public access to the heritage property will qualify, eg. the provision and upkeep of car parks and public lavatories, the wages of guides and attendants and special fire precautions. Lighting, heating and security costs and the upkeep of roads and drives will qualify to the extent that they are made necessary by public access.
- Generally, all expenses for prudent management of the property in the maintenance estate, this would allow the trustees to make both capital and revenue expenditure on repairs and maintenance of the property in the fund.
The assistance of Building Surveying Services will normally be required in maintenance fund cases with regard to the cost of maintenance and repair and accordingly advice should be requested at an early stage.
HMRC(IHT) are often unable to provide full details and the caseworker should therefore ensure that all the information required is obtained from the parties. From experience in cases of this type the resident or retained agent is usually very helpful and keen to assist. The caseworker should make sure that full details of the maintenance works required and the cost involved, and of income from the property to be included in the maintenance fund are obtained.
As mentioned in para 20.2 above cases involving heritage property should be given priority. This however applies particularly to maintenance fund cases where the time limits can often be tight.
The initiating instructions will state when the report is required and CEO DVS should be notified immediately if this is likely to be missed.
It is not possible to give guidance on the exact form of the report as the circumstances vary from case to case. However, a comprehensive and helpful report should be provided as this will form the basis of HMRC(IHT)’s deliberations and may well be passed on to other Government Departments or other interested bodies.
All reports on maintenance fund cases should be sent in duplicate to CEO DVS for onward transmission to HMRC(IHT).
Offers of Property in Lieu of Tax
The Board may with the agreement of the departmental Ministers with responsibility for the environment and arts, accept property in whole or part satisfaction of a CTT or an IHT debt. There are similar provisions for an ED debt. Property may also be accepted in satisfaction of interest accrued on CTT, IHT or ED as well as in lieu of the tax itself. Where property is accepted neither CGT, Stamp Duty Land Tax nor VAT is charged.
Since 1987, offerors have been given a choice to agree either:
- a price based on the value of the item at an agreed date (normally the date the property is offered, “the offer date”) earlier than that on which the property is actually accepted, and pay no interest on the tax from that date (the new option); or
- an acceptance price based on the value of the item when it is formally accepted, with interest running until then (the former rule).
This option applies to formal acceptances on or after 17 March 1987, including acceptance of items under consideration before then (s.60 FA 1987 & s.97 F (No 2) A 1987).
HMRC will assume that future offers are made on the new (“offer date”) basis unless the offeror gives notice to the contrary.
Normally offers of property in lieu are made direct to HMRC(IHT) but occasionally the parties may enquire whether the transfer of any property would be accepted, either partly or wholly, in lieu of IHT. Such enquiries should not be commented upon and the parties should be told to approach HMRC(IHT).
If as a result of considering the initial offer of property in lieu, and following consultation with the relevant Government Departments HMRC(IHT) are prepared to give the offer further consideration, they will call for a descriptive report on the property and at the same time indicate the extent of any arrangements which have been made for its inspection.
Requests for assistance will be made by HMRC(IHT) to CEO DVS who will forward the papers to the Group.
When the request is received preparation of the report referred to in para 20.32 should be commenced and this should closely follow the lines suggested in Appendix 29.
The report should not include any financial matters such as the valuation of the property and should be prepared and forwarded as a matter of urgency to CEO DVS in triplicate accompanied by plans showing the boundaries of the property and any other descriptive material available.
At the same time as the descriptive report is issued a separate covering report should be forwarded in duplicate to CEO DVS which should state:
a) whether any IHT papers have been referred, and the values reported; b) the opinion of the Current Market Value as at the agreed date (see para 20.30 above) of the property excluding the value of any timber which should be stated separately; c) the opinion of value of the property as at 31 March 1982 (or other relevant date to be notified by HMRC(IHT)) to enable the capital gain occasioned by the in lieu arrangements to be calculated; d) any matters likely to affect the suitability of the property for use by bodies such as the National Trust, or for administration by the Commissioners of Crown Lands including a note of any properties in the neighbourhood in the ownership and/or occupation of any of the named bodies (Sch 3 IHTA 1984).
Where the property is deemed suitable for acquisition a request to negotiate provisionally an agreed figure will be made. In initiating such negotiations care should be taken to inform the parties:
- that the value at which the property will be accepted will be the Current Market Value as at the agreed date (unless instructions varying the basis are issued in any particular case); and
- that any agreement will be provisional and subject to the confirmation of the HMRC(IHT) as part of the Board of His Majesty’s Revenue & Customs.
Negotiations should proceed expeditiously and in such a manner as to give the parties no grounds for complaint of delay on the part of the VOA. If it becomes apparent that there is a wide divergence of views as to the value likely to render the negotiations abortive or prolonged, then the details should be reported to CEO DVS in order that HMRC(IHT) may be acquainted of the position.
If at any stage prior to completion the caseworker becomes aware that there may be a possible acquisition by a public body which is not already covered in the original descriptive report CEO DVS should immediately be advised giving such details as are available.
The report of provisionally agreed terms should be forwarded in duplicate to CEO DVS and should confirm that the subject matter of the agreement is identical to the matters contained in the first report. If this is not the case any revisions, additions or exclusions should be related. Plans should clearly indicate the extent of the property.
Public Purchase: Private Treaty Sales
In certain cases where private treaty sales of land of outstanding scenic interest etc and historic buildings are made to certain bodies listed in the Act, the views of the VOA are occasionally sought by HMRC(IHT) on the market value and values as at 31 March 1982 proposed by the owner or executor, as the Act may provide for exemptions and reliefs.
It is not envisaged that a report to the extent of that indicated in para 20.33 is necessary. These requests should be approached in much the same way as normal IHT cases. The caseworker should bear in mind however the likelihood that some urgency attaches to such references and endeavour to provide the HMRC(IHT) with an opinion at the earliest possible date.
Capital Gains Tax
Provided the conditions for conditional exemption are satisfied relief from CGT will be available. Property cannot be accepted in lieu of CGT under the Heritage rules, but no CGT is charged if property is accepted in lieu of IHT although it is usually necessary for HMRC(IHT) to calculate a notional charge in arriving at the appropriate tax credit.
Registration
Cases received from the HMRC(IHT) through CEO DVS should be registered in accordance with the normal procedure for IHT life or death cases. All references should be treated as formal.