Clause 111 - Gifts to the nation: estate duty

Finance Bill – in a Public Bill Committee at 4:45 pm on 10 June 2014.

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

Photo of Gary Streeter Gary Streeter Conservative, South West Devon

The debate on clause 111 will be led by the one and only Catherine McKinnell.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Thank you, Mr Streeter. The clause provides for technical changes to the cultural gifts scheme. It corrects a technical flaw in the legislation and will ensure that the cultural gifts scheme works in  line with the publicly stated policy. To understand the policy intention of the cultural gifts scheme with regard to estate duty, it is worth revisiting the legislation as it stands. The cultural gifts scheme was introduced by schedule 14 to the Finance Act 2012.

Photo of James Duddridge James Duddridge Chair, Regulatory Reform Committee, Chair, Regulatory Reform Committee

I hesitate to interrupt the hon. Lady’s flow. I would like to claim that was meant to be funny but I in fact just stumbled on my words. I would be interested as to why she is speaking to the clause at this stage and whether she has any preliminary views on why it might be flawed or whether this is more an introductory message about the Labour party’s overall position. I hope I will not have to intervene again and that she will be comprehensive in her remarks, but I stand ready to probe her in detail and I am sure she will be gracious in giving way.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I thank the hon. Gentleman for his intervention, which very much hit the nail on the head. At this stage, we need to reflect on the previous Finance Act when this policy was initially enacted. We had a robust debate at the time, and he is right to query whether we will simply revisit those arguments or whether there is a new proposition we need to look at. It was introduced at the time to encourage lifetime giving of culturally significant objects to the nation in exchange for a reduction in the donor’s income tax and capital gains liability—a policy objective which the Opposition very much supported.

At that time, I did raise concerns about one particular aspect of that legislation, paragraph 33 of schedule 14, which appears to be the subject of the changes provided for in the clause now before us. On behalf of the Opposition, I outlined the concerns that the provisions contained in paragraph 33, announced following consultation, were considered to be significantly different from those originally announced and proposed, something that the ICAEW in particular thought was wrong in principle. Perhaps the fact that the Government are now going to revisit the provisions in the light of “technical flaws” shows that the ICAEW and the Opposition were right to have those concerns. Paragraph 33 of schedule 14 provides a partial exemption from estate duty on exempt objects that would otherwise have become chargeable under schedule 5 to the Inheritance Tax Act 1984 on a gift of property under the scheme.

It is worth noting that estate duty has not existed for many years, having been replaced by capital transfer tax and then inheritance tax. However, under the estate duty legislation, there were rules similar to those contained in the cultural gifts scheme which meant that an estate duty liability could be deferred. In other words, where an asset was of historical or scientific interest, estate duty liability could be deferred and would crystallise on the subsequent disposal of the asset on the open market. While that regime no longer exists, a deferred estate liability would still be a charge to estate duty, as opposed to any other form of inheritance tax.

The partial exemption for estate duty provided in schedule 14(33) to the Finance Act 2012 was intended to be limited to the amount that would be chargeable if the rate of tax was the same as the rate of inheritance tax, which is currently 40%. Where the rate of estate  duty attached to the exempt object is more than the rate of inheritance tax—it can be as high as 80%—the policy intention was that the excess amount should become chargeable. However, a technical flaw in the Finance Act 2012 meant that in some cases, on which I hope the Minister will be able to provide more information, the latent estate duty has not come into charge on a gift as it should have done at any rate above 40%, therefore remaining deferred. It means that donors of objects on which there is a deferred estate duty liability are better off donating it under the cultural gifts scheme, avoiding any deferred liability, rather than selling it on the open market. That was apparently not the intention of the policy.

The proposed new paragraph 32A ensures that the intended amount of estate duty comes in to charge by specifying that, for the purposes of estate duty, any qualifying gift to the nation under the cultural gifts scheme will be deemed as if it were for sale at market value and thus allow the intended amount of estate duty to be charged. The scheme has been in effect for more than a year, so will the Minister inform the Committee of progress so far? How many donors have donated pre-eminent objects as a result of the estate duty exemption? Opening the cultural gifts scheme to include those liable for estate duty was intended to provide a greater pool of eligible objects. As I mentioned, the explanatory notes and the tax information impact note suggest that donors may have benefited financially from the technical flaw by donating through the scheme as opposed to selling on the open market. Is the Minister able to give an idea of in how many cases this may have happened or how many donors the Government think may not have had to pay that estate duty and may have benefited from this technical flaw? Are there any estimates of the Exchequer revenue losses as a result of the technical flaw? Considering that estate duty can be anything up to 80%, the Exchequer could potentially have lost significant amounts of estate duty, up to the rate of 40% on any relevant object—that would be in the worst case. It would be useful if the Committee could hear an indication of the level of potential Exchequer losses.

Photo of David Gauke David Gauke The Exchequer Secretary

It is a pleasure to respond to the hon. Lady in respect of clause 111 which amends the estate duty provisions of the cultural gifts scheme to ensure the scheme works as originally intended. The excitement of discussing the clause could make anyone breathless, but I will do my best. The measure means that a gift of a pre-eminent object carrying a latent estate duty liability, known as a conditionally exempt object, is deemed to be a sale for the purposes of the scheme. This means that donors of such objects cannot receive more of a financial benefit from their donation than if they had sold the object on the open market.

The cultural gifts scheme was announced at Budget 2011 and introduced in 2013. Its purpose was to encourage people to donate pre-eminent works of art and historical objects to the nation. In return, donors receive a reduction in their UK liability, based on a percentage of the value of the object they donate. Individual donors are entitled to a reduction in their income tax or capital gains tax liabilities of 30% of the value of the object. Companies are entitled to a reduction in corporation tax of 20% of the value of the object. The amount of the tax reduction  ensures that there is always an element of philanthropy in the gifts: donors will be less well off than if they had kept their objects or sold them on the open market.

Even though it is still new, the scheme has been a great success. People are already enjoying gifts made under the scheme, such as the Lennon and McCartney lyrics  now on show at the British Library. We announced at the Budget that an extra £10 million a year in funding is being made available for the scheme, to allow even more objects to be donated under it.

However, there is a technical flaw in the legislation, relating to condition-exempt objects carrying a latent state duty liability. Unfortunately, a consequential amendment was overlooked when the original legislation was drafted. The consequence of that flaw is that estate duty above the inheritance tax threshold of 40% is not always brought into charge on the gift of a condition-exempt object under the scheme, because in most cases the underlying estate duty rules bring the duty into charge only on the sale of an object.

Without the amendments introduced by the clause, a donor could be better off donating an object under the scheme than if they sold it on the open market. For example, an individual could benefit from a waiver of estate duty of up to 80% of the value of the gift, plus a 30% tax reduction. That would clearly undermine the philanthropic purpose of the scheme.

The clause amends the estate duty provisions of the cultural gift scheme and ensures that it will work as intended. For the purposes of the estate duty, any gift of a pre-eminent object to the nation under the cultural gift scheme would be deemed to be in sale at market value. That will allow the latent estate duty above the inheritance tax threshold of 40% to come into charge, ensuring that the scheme works in line with the original, publicly stated policy. The changes will affect only a handful of donors, who may have a pre-eminent object that became condition-exempt before 1965 and that they wish to give away under the cultural gift scheme. We expect the impact to be minimal.

On the questions raised by the hon. Member for Newcastle upon Tyne North about the scale of use of the scheme, eight applications have been made, three offers have been refused under the scheme: one was not owned by the applicant, one was not pre-eminent and the other had the estate duty attached to it and the donor did not want to wait for estate duty provisions to be changed in line with the stated policy. How many offers have been refused because of this issue? One. The donor was asked if they would like to make their offer once the law had been corrected, but they did not want to. How many people have taken advantage of the technical flaw, by giving more than intended? None. The Department for Culture, Media and Sport and Arts Council England, who administer the scheme for DCMS, agreed that they would not register any applications that may have a estate duty on them until the provisions were corrected.

I hope that those points help the Committee and that the clause stands part of the Bill.

Question put and agreed to.

Clause 111 accordingly ordered to stand part of the Bill.