Inheritance tax: gifts for national purposes etc

Finance Bill – in a Public Bill Committee am 2:15 pm ar 5 Gorffennaf 2016.

Danfonwch hysbysiad imi am ddadleuon fel hyn

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following:

Government amendments 122 to 126.

Clause 86 stand part.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

Clauses 85 and 86 make a number of changes to ensure that certain tax reliefs available for objects of national heritage continue to be appropriately targeted and that those objects remain accessible for the nation to enjoy. The first change, clause 85, ensures that legislation keeps pace with the way museums are structured. Clause 86 will regulate the interaction of estate duty and inheritance tax for many objects of national, historic and cultural value and will enable HMRC to take appropriate action in the event of such an object being lost.

It might be helpful if I explain briefly how the current exemption works for museums and galleries. To encourage gifts and bequests to public collections, those gifts and bequests are currently exempt from inheritance and capital gains tax if they are accepted by the receiving public institution. In addition, existing rules allow private owners to sell their heritage chattels to public institutions in the UK rather than on the open market, where there is a real risk that the chattel will go abroad. The acquiring UK institution maintains and preserves the chattel and displays it for the ongoing benefit of the UK public. In 2015-16, heritage property with a total value of more than £33 million was sold tax free to such bodies. Without that support, magnificent items such as the Wolsey Angels, which were recently acquired by the Victoria and Albert Museum, would have been lost to the nation.

The criteria for deciding whether a museum or gallery is eligible for the reliefs have changed little since the introduction of inheritance tax in 1984. However, recent changes in the way local authorities administer their cultural services have caused many museums and galleries to fall outside the advantageous tax provisions currently provided by the legislation. That has happened at a time when those advantages are needed to encourage individuals to donate or sell to such bodies in order for their collections to grow for the public’s enjoyment. Devolving a museum from direct local authority control allows it more independence in pursuit of preserving and displaying its collection, freeing the museum from the wider corporate and political issues. However, without changes to the legislation, sales of assets to those entities that would previously have qualified for relief will no longer qualify. It is therefore essential to ensure that the legislation is updated to reflect the way the sector operates.

Clause 85 amends schedule 3 to the Inheritance Tax Act 1984 to include collections that have in the past been maintained by local authorities but now operate under, for example, independent charitable trust status. The clause will also transfer from HMRC to the Treasury the power to approve other national institutions. That change is being made to reflect the fact that the Treasury is directly accountable to Parliament and has responsibility for allocating the culture budget to the Department for Culture, Media and Sport.

I will turn now to clause 86. Inheritance tax was introduced in 1984 and replaced capital transfer tax, which in turn had replaced estate duty in 1975. The current inheritance tax legislation provides a conditional exemption where an item is of pre-eminent quality. The exemption is available for either inheritance tax or capital gains tax and allows the charge to be deferred, provided that certain conditions are met. If any of the conditions are breached or the asset is sold, tax becomes payable. The exemption applies to lifetime transfers and gifts and exists to prevent certain assets that are considered to be of national importance from being sold off and potentially leaving the country.

HMRC has been aware of a growing number of cases in which conditional exemption from an IHT charge is sought solely in order to substitute a lower rate of IHT for a higher rate of duty. That practice allows individuals to benefit from a lower rate of tax, at 40%, under the inheritance tax regime, rather than the estate duty, which would have been up to 80%. It therefore seems that in some circumstances the current legislation is used merely as a tax planning tool and not to ensure the preservation of objects of national heritage importance. In addition, there is currently no legislation in place in a majority of cases to allow HMRC to raise a charge when the owner of an estate-duty-exempt object loses or misplaces it as a result of their negligent actions. I am sure that all members of the Committee will agree that such practices should no longer continue and the Government need to take action now.

Clause 86 amends existing legislation on estate duty to stop individuals from using the provisions to pay inheritance tax at a lower rate than estate duty would be payable. That will ensure that the exemption is used as intended: to preserve objects of national heritage rather than as a tax-planning tool. The change will also bring legislation in line with provisions for lifetime transfers, where HMRC can elect for either an inheritance tax or estate duty charge. The second change will bring in a charge on objects that were exempted from estate duty but have subsequently been lost. The definition of loss will include theft and destruction by fire, although HMRC will have the discretion not to impose a charge when such a loss is not attributable to the negligence of the owner.

I turn now to the five amendments that the Government have tabled to clause 86. They are being made in response to comments we received following publication of the Finance Bill in 2016 and will ensure that the legislation works as intended. Amendment 122 clarifies that when an item is lost, HMRC will raise only a single charge for duty on the loss of the item, rather than a dual charge for the loss and breach of the conditions under which the item was originally exempt from duty.

Amendment 123 provides that clause 86 will apply to objects granted exemptions under the terms of the Finance Act 1975. That is necessary because the subsequent Finance Act 1976 failed to bring a discrete subset of material granted conditional exemption between March 1975 and April 1976 within the auspices of the new Act. If the legislation is not amended, such objects will be treated inconsistently with those exempted under the post-Finance Act 1976 regime. There are no good reasons to treat these exempted objects differently.

Amendment 124 ensures that in identifying the last death on which an object was passed, any death on or after 6 April 1976 is to be disregarded. That will ensure that the appropriate rate of estate duty is used. Amendments 125 and 126 make minor consequential changes to take into account the other amendments.

It goes without saying that the value of our culture and heritage to society is immeasurable. The changes that I have outlined will mean that our museums and galleries can continue to benefit from tax exemptions that will allow them to purchase more works of art for the enjoyment of the British public. The changes will also provide much needed consistency in the way that conditionally exempt objects are treated. I therefore hope that the clauses can stand part of the Bill.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee 2:30, 5 Gorffennaf 2016

The Minister has given us an articulate and detailed summary of how the clauses work in practice, so I will not go over too much of that again. I briefly note that the provisions make technical changes to the tax treatment of gifts or sales of property to public museums and galleries and objects of national scientific, historic or artistic interest respectively.

Clause 85 makes technical changes to support the exemption from inheritance tax of gifts or sales of property to public museums and galleries. It is necessary, as the Minister said, because recent changes in local authorities have led museum collections to be placed in charitable trusts. Those trusts do not presently fall within schedule 3 to the Inheritance Tax Act 1984, which describes the bodies that attract inheritance tax and capital gains tax relief. The clause simply rectifies that and moves the power to designate schedule 3 bodies from HMRC to HM Treasury. We have no issue with this technical clause, but I am interested to know what the justification was for moving the power to add bodies to schedule 3 from HMRC to HM Treasury. As a general question, what assessment was made in the long term of the efficacy of local authorities in managing museums and galleries? The Minister might want to refer that question to another Department and get back to me in writing.

Clause 86 puts a stop to using existing law to pay inheritance tax at a lower rate than estate duty. Estate duty was replaced in 1975 by capital transfer tax, which was replaced by inheritance tax in 1984. However, legacy estate duty legislative provisions still remain in force in relation to exemptions given pre-March 1975. Estate duty can be levied at up to 80%, whereas inheritance tax is currently at 40%. The clause stops individuals using a gap in legislation to claim conditional exemption solely to facilitate a later sale of 40% instead of up to 80%.

There is also provision for HMRC to be able to raise a charge when the owner loses an estate duty exempt object. That leads me nicely on to Government amendments 122 to 126, which make technical changes to ensure that the legislation operates as intended. Amendment 122 clarifies the rules around HMRC’s ability to raise a charge for duty on the loss of an item, so that it will raise only a single charge rather than a dual one. Amendments 123 and 124 ensure that the legislation works in specific circumstances, as intended, and amendments 125 and 126 simply make minor consequential changes. We are more than happy to support these clauses and Government amendments.

Question put and agreed to.

Clause 85 accordingly ordered to stand part of the Bill.

Clause 86