Tax break is cheap way to keep our national treasures

30 June 2011: HM Revenue & Customs’ (HMRC) proposed tax reliefs for giving pre-eminent works of art to the nation, outlined in a consultation paper published yesterday, could take pressure off arts funding, according to PKF Accountants & business advisers.

Under the proposals, philanthropic donors will be eligible for a tax reduction based on a percentage of the value of the asset being given to the nation. The consultation document envisages this being 25% of the value of the donation, subject to an annual cap (currently £20m). Such gifts would also be exempt from capital gains tax and any inheritance tax triggered on the donor’s subsequent death.

Andrew Penman, London Head of Private Client Tax Services at PKF, said: “For the government, the cashflow advantages are clear. For example, if this relief prompts an individual to donate a national treasure worth £10m to the nation, arts bodies will not have to scramble to find £10m now to guarantee it stays in the country. But the cost to the government is limited to tax of £2.5m that it won’t collect next year.“

The scheme will operate under broadly the same conditions applying to the existing ‘Acceptance in Lieu’ scheme whereby inheritance tax liabilities can be satisfied by offering pre-eminent works in lieu of payment. It will be possible for a donor to nominate an institution to which the works will be allocated but such nominations would have to be approved by the panel assessing the suitability of the work for acceptance under the scheme.

Andrew Penman, adds:

“At present, the tax system provides an incentive for philanthropic donors to make tax-efficient gifts to charities. For example, making a cash donation to a charity, on which Gift Aid relief at their top tax rate can be claimed, and then selling the artwork to the charity and suffering capital gains tax on the sale, can give donors effective tax relief of at least 22%." [see notes to editors]

“Offering a simple tax reduction at 25% for those who donate to the nation instead, levels this playing field and may trigger competition between charities and the government for donations of this type.”

Ends

For further information, please contact: Andy Konieczko, 020 7065 0537, andrew.konieczko@uk.pkf.com Jane Soares, 020 7065 0135, jane.soares@uk.pkf.com

Notes to Editors:
1. Example of gift aid route, assume you have a painting valued at £10m:

Example 1:
Give the painting to the nation.
Donor claims a tax reducer of 25%.
Tax saving £2.5m.

Example 2:
Give the charity £8m cash.
Charity claims Gift Aid 20%, gross receipt by charity £10m.
Donor claims higher rate Gift Aid relief 30% - effective tax reduced by £5m.
Sell painting to charity for £10m. If no base cost, capital gains tax 28% of £10m ie £2.8m.
Tax saving £5m less £2.8m ie £2.2m.
Effective rate of tax relief = 22%.

Example 3:
Give the charity £8m cash.
Charity claims Gift Aid 20%, gross receipt by charity £10m.
Donor claims higher rate Gift Aid relief 30% - effective tax reduced by £5m.
Sell painting to charity for £10m. If base cost £5m, capital gains tax 28% of gain £5m ie £1.4m.
Tax saving £5m less £1.4m ie £3.6m.
Effective rate of tax relief = 30%.

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