Heritage Property and Conditional Exemption: Key Considerations for Public Access

I recently inherited some chattels of national pre-eminence and am thinking about claiming conditional exemption in respect of the previous owner’s death. What should I expect?

What is the conditional exemption for heritage?

Conditional exemption is a mechanism for deferring inheritance tax (IHT) and/or capital gains tax (CGT) on objects or collections of national, scientific, historic or artistic pre-eminence.  It can also be claimed in respect of outstanding landscapes and historic buildings.

Its origins lie in the policy desire to conserve national heritage for the benefit of the public.  In other words, it is designed to avoid the forced sale of items, or indeed historic houses, which might otherwise be triggered by the need to fund the tax due on them.

Why is heritage property “conditional”?

It is “conditional” because the deferment only persists for so long as you adhere to the conditions of the regime.  In exchange for deferring the tax charge which would otherwise be due, you provide undertakings to:

• provide public access (more on this below);
• keep the items in the country (except for a purpose and a period approved by HMRC); and
• take reasonable steps for their preservation.  It is notable that this is only preservation, not enhancement.

It is worth saying that conditional exemption is normally considered the tax planning of last resort because it only defers the tax.  If 100% reliefs, allowances or absolute exemptions are available, these will be preferable.

Tax is deferred on heritage properties, when could it become due?

For items which are conditionally exempt from IHT, the deferred tax will become due on:

• A failure to observe the undertakings in a material respect.  This would also include the loss, theft or destruction of the items where reasonable steps have not been taken to ensure their preservation.
• The death of the owner, unless the undertakings are renewed by their heirs.
• A disposal (eg by gift) of the items, unless the undertakings are renewed by the recipient.
• The sale of the items. 

What does “public access” mean for heritage properties?

Normally the undertakings will require public access to the chattels for 28 days a year, or comparable multiples over a two or three year period.  

Although the undertaking itself may be perfunctory on the matter of public access, HMRC guidance is quite detailed.  Normally, they would like the 28 days to include one day a week plus Bank Holidays during the spring and summer months.  Access should be for at least four hours a day, between 10am and 5pm.  

Public access can be provided by way of opening the house where the items are situated.  However, if the items are modest in number, or the house not particularly suitable for public access, HMRC will encourage satisfaction of the public access condition via loans to museums or galleries.

As part of the public access undertaking, you will also be expected to allow access by prior appointment on non-access days for research and study and there is normally a requirement to provide photographs to curators.

It should be noted that what constitutes reasonable public access is very fact-specific and so, although the above is a guide, it will pretend on the particular circumstances and the negotiations with HMRC on this matter.

Can I make pre-booking a requirement?

You can recommend it!  However, it is important that you still allow “walk ins”.   This is because, since 1998, access via “prior appointment only” no longer satisfies the public access undertaking.

Am I “locking” my successors into a burdensome regime?

If your successors wish to keep on deferring the tax, then they are indeed locked into the regime, including the public access requirements.  Each generation will need to undertake their own cost-benefit analysis as to whether this is a price which they consider worth paying.  Some families take the view that it is – particularly if the house is opened during the summer period when they may not be at home.  Others, who may have decided to open their house on a commercial basis, may not find it arduous at all.  

If at any point your successors want to come out of the regime, the deferred charge will become due and on the market value of the assets at that time.  If, for example, conditional exemption from IHT was obtained on a £1m painting in 1995, the relevant rate “on foot” will be 40%.  If, when the painting is taken out of the regime, the painting is worth £5m, £2m of IHT will become due.

How is the application made for conditional exemption?

Normally the executors fill in a specific conditional exemption form (IHT420) as part of the IHT return for the estate, although often this is accompanied by side correspondence with HMRC’s Heritage Team.  

An expert in the area should be asked to prepare an inventory of the chattels (together with photographs) and an explanation of why they should be considered pre-eminent.  Usually, the inventory will flag any items which have previously been conditionally exempted.

You will need to put together a proposed visitors’ route (on a floorplan) which will allow visitors to see all the conditionally exempt chattels.  If it is impossible in respect of a particular item, then it may be possible to negotiate alternative arrangements with HMRC (such as viewing “on request” for that specific item) but this is increasingly rare.  Think about how intrusive the proposed route will be.  Is it possible to move the chattels into one or two rooms for the open days?

As mentioned, typically a letter is sent to HMRC’s Heritage Team enclosing the inventory and setting out:

• where the items can be inspected;
• how the owner proposes to preserve the items;
• how the owner proposes to meet the public access requirement;
• how the public access will be publicised; and
• certain confirmations that the items are not going to be sold, offered in lieu (a subject for another time!) or removed from the country.

Once HMRC receives the request, it will ask Arts Council England to opine on the pre-eminence of the items.  Arts Council England are likely to wish to visit the items in order to provide their opinion.  They may also make some suggestions as to whether there could be improvements to how the items are exhibited eg if they are liable to sun damage due to their position.

The claim needs to be made within two years of death.  If the decision is made not to make a claim, IHT will be due on the item within six months of death and interest will accrue after that date.

What information needs to be made publicly available?

Details of the chattels, their location, access days and contact details will be published on HMRC’s website. Owners are also expected to publicise the arrangements on their website or in appropriate local guides.

Can I charge for opening the house?  I am concerned about covering the extra costs involved.

Yes, but this should not be seen as a means of producing a profit!  

Reference should also be made to comparable charges elsewhere; the charge should not so high as to dissuade public access.

HMRC’s guidance makes it clear that it is not acceptable for owners to seek to recoup the costs of preservation through an access charge.

It would be worth considering how the mandated public access days fit into your strategy for the house and Estate diversification plans more generally.  For example, it may be that your Estate wishes to offer special events or premium tours (eg with afternoon tea).  If this is a route which you are keen to explore, take advice on the best structure for this leisure business and the income tax and VAT implications.

Additional Information of conditional exemption for Heritage Properties

Do a health and safety assessment and consider the practicalities of opening your house.  Where is the parking?  Are there toilet facilities?  Is there disabled access?  Really importantly - have you got appropriate insurance in place?

It is also worth thinking about whether change of use or planning consent might be required from the Local Council.  This may be particularly important if there are going to be physical changes to the premises eg new entrances, parking, tea rooms or a separate “museum-style” annexe for the items.