Practice · Foundations and legacy · Glossary
Conditional exemption
Conditional exemption is a United Kingdom relief that exempts heritage property from inheritance tax when it passes in a transfer of value, such as a gift or a death. It needs three things: a claim, the Treasury’s designation of the property, and the required undertaking from the person the Treasury thinks appropriate (ss. 30 to 35A, Inheritance Tax Act 1984).
Published by ArtisDomus, written by Polina Surina.
The tax is only deferred. It is held back in return for promises, and it falls due as soon as a promise is broken or the property passes on. The claim must be made within two years of the transfer. For a potentially exempt transfer, a type of lifetime gift, the two years run from the death. The Board can allow longer.
It is United Kingdom law and does not apply in France.
What can be designated
Four kinds of property qualify, each with its own undertaking.
The Treasury can designate four kinds of property (s. 31(1)). The first is any relevant object the Board considers pre-eminent for its national, scientific, historic or artistic interest. The other three turn on the Treasury’s opinion. The second is land of outstanding scenic, historic or scientific interest. The third is a building whose outstanding historic or architectural interest calls for special steps to preserve it. The fourth is land essential to protect the character and amenities of such a building.
For an object, the undertaking runs until the beneficial owner dies or the object is disposed of (s. 31(2)). The object must stay permanently in the United Kingdom. It may leave for a time only for a purpose and a period the Treasury approves. Reasonable steps must be taken to preserve it and to give the public reasonable access. For land and buildings, the undertakings cover maintenance, repair, preservation and reasonable public access (s. 31(4)).
HMRC guidance spells out what reasonable access means. Where visits are by appointment, the owner must offer a choice of at least three weekdays and two Saturdays or Sundays within four weeks of the request. The visitor picks the day, and the visit falls between 10am and 4pm. A reasonable charge may be made.
Undertakings can be changed (s. 35A). The Board and the person bound can agree a change. The tribunal can also order a change if all three conditions are met: a proposal has been made, the person has not agreed within six months, and the change is just and reasonable in all the circumstances. The date it sets must be at least sixty days after the order.
What ends it
A breach, a death or a disposal brings the tax back.
- Breach
- If the Treasury finds that an undertaking has been broken in a material way at any time, that is a chargeable event and the tax falls due (s. 32(2)).
- Death
- The death of the beneficial owner (s. 32(3)(a)). The exceptions in section 32(4), (4A) and (5) apply.
- Disposal
- Any disposal of the property, by sale, gift or otherwise (s. 32(3)(b)). The same exceptions apply.
- The amount
- Tax is charged on the value of the property at the time of the event (s. 33(1)(a)). If the event is an arm’s length sale with no intention to give anyone a free benefit, the tax is charged on the sale proceeds (s. 33(3)).
The tax uses the value on the day of the event. On a holding that has grown in value for thirty years, the tax that falls due is larger than the tax that was deferred. The relief has quietly become a bigger bill than the one it put off.
Two ways out
A sale or gift to a Schedule 3 body, or acceptance in lieu, ends it without a charge.
A death or disposal is not a chargeable event if the property goes to a body listed in Schedule 3. It must go by private sale (private treaty) or by any means other than a sale. The same holds for a transfer under section 230, acceptance in lieu (s. 32(4)). After a death, the personal representatives have three years to make such a disposal. For settled property (property held in trust), the trustees or the person next entitled have the three years. A death, or a disposal other than by sale, is also not a chargeable event in two more cases (s. 32(5)). Either the transfer is itself conditionally exempt, or fresh undertakings are given under section 32(5AA).
Schedule 3 lists the bodies. They include the National Gallery, the British Museum, the National Museums of Scotland, the National Museum of Wales, the Ulster Museum and any similar national institution approved by the Treasury. Museums and art galleries run by a local authority or a university count, as do university libraries. Also listed are the Historic Buildings and Monuments Commission for England, the National Trust, the National Trust for Scotland and the National Art Collections Fund. So are the Trustees of the National Heritage Memorial Fund, the Friends of the National Libraries and the Historic Churches Preservation Trust. Natural England, Scottish Natural Heritage, the Natural Resources Body for Wales and the Marine Management Organisation are included too. So are any local authority, any government department, any university or university college in the United Kingdom, and a health service body.
The second route is explained under acceptance in lieu. The same Act rules out the valuation argument called a blockage discount.
Sources
- Inheritance Tax Act 1984 (1984 c. 51), ss. 30(1), 30(2), 30(3BA)
- Inheritance Tax Act 1984, s. 31(1)(a) to (d), s. 31(2), s. 31(4)
- HMRC, Tax relief for national heritage assets, guidance, last updated 26 May 2022
- Inheritance Tax Act 1984, s. 35A
- Inheritance Tax Act 1984, ss. 32(2), 32(3), 33(1), 33(3)
- Inheritance Tax Act 1984, s. 32(4), (5), (5AA); Sch. 3