Introduction
 There have been occasional recent references in the press as to how a different tax regime in an independent Scotland might affect art ownership and where it is held e.g. The Times 22nd February where Nicholas Penny, Director of the National Gallery in London, raised the issue of art held in public collections ownership of which is currently shared by institutions North and South of the Border. Whatever the outcome of the September Referendum, the status quo seems likely to change with more taxation being devolved to Scotland. With a number of clients owning property both North and South of the Border, Pall Mall Art Advisors thought that it might be helpful to ask Turcan Connell with its strong private client, wealth management and tax focus and which too has a substantial North/South clientele, to set out some of the possible tax implications. The Referendum
On 18th September 2014, residents of Scotland will have the opportunity to take part in a referendum about the constitutional future of Scotland. The referendum question will be “should Scotland be an independent country?” Since the referendum was publicly announced, both sides of the campaign have been trying to convince the people of Scotland that their view for the future of the country is the one which ought to be adopted. Throughout the campaigns, it has become apparent that the status quo is unlikely to remain. In the event of a yes vote, the changes will be more obvious but, in the event of a no vote, it is looking increasingly likely that there will be increased devolution to Scotland, particularly in relation to taxation and spending powers. Taxation
On the subject of taxation, the Scottish Government’s white paper says that, in the event of a yes vote, the UK tax code will be adopted in full and it will then be for the Scottish Government at that time to consider what changes are to be made. As a result, there have been very few statements of intention when it comes to taxation in an independent Scotland. It is difficult to be certain, therefore, what changes might be enacted in the future. This will depend to a large extent on the colour of the Scottish Government that is in power at that time. The lack of announcements is particularly stark when it comes to capital taxation. Neither campaign has made any clear statement about the way in which they will approach the taxation of capital following the referendum. The Scotland Act 2012 includes changes to the taxation system in Scotland that are already due to come into effect. However, these changes are limited to the taxation of income from April 2016 (and that only on a part of the tax rate and only on non-savings income), a replacement in Scotland for stamp duty land tax (and the Land and Buildings Transaction Tax Act has already been passed to come into effect from April 2015) and some other relatively minor changes. There is nothing in the 2012 Act that has any effect on either capital gains tax or inheritance tax. The political parties that are against Scottish independence have started to release details of the way in which they think additional powers will be granted to Scotland in the event of a no vote. These statements vary at the moment from almost full independence when it comes to the raising and spending of public money to a more extensive version of the powers already contained in the 2012 Act. It remains to be seen if any more detail is added to any of these proposals. The over-arching view seems to be that there will be increased taxation powers regardless of the outcome of the referendum. As such, the likelihood is that there will be a divergence between Scotland and the rest of the UK of the way in which and the rates at which taxation applies. Heritage and Cultural Assets
How might all of this impact on heritage and cultural assets? A number of statutory schemes exist already which provide exemptions or relief from capital taxation. Some of the more common of these are discussed below. Conditional exemption
This exemption is designed to preserve national heritage by allowing private parties to reach an agreement with HM Revenue & Customs. In order for this option to be available, the property in question must be of significant importance to the nation. In return for an exemption from inheritance tax, the owner of the property must undertake to HM Revenue & Customs that the property will be preserved, that access by the public will be permitted and that the property will remain in the United Kingdom. It is, on the face of the matter, possible that, if Scotland were to separate from the United Kingdom, current conditionally-exempt items would be forced into breach due to Scotland no longer forming part of the United Kingdom – although it would be hoped that some pragmatic solution could be worked out. If that were to be the case, there would be very large tax liabilities for unsuspecting parties – particularly when the conditional exemption was given in relation to an estate duty charge which could be as high as 80% of the value of the property. In those circumstances, the parties in question would almost certainly be forced to sell the property in question. Acceptance in lieu
This is a specialised option available to taxpayers whereby heritage property may be offered to the nation in settlement of a liability to inheritance tax. As a result, important works of art become owned by the nation and can be displayed publicly. The alternative could be a forced private sale of the works of art in order to raise the funds to settle the tax liability and the works of art could be sold overseas. In order to be accepted, the property in question must be pre-eminent for its national, scientific, historic or artistic interest. Specifically, it is provided by statute that “national interest” includes interest within any part of the United Kingdom. Government indemnity scheme
The Government Indemnity Scheme is a mechanism by which significant works of art can be publicly displayed in the UK. The scheme provides an alternative to otherwise very expensive commercial insurance policies which would render the display of such works of art impossible for most national institutions. Under the terms of the National Heritage Act 1980, museums, galleries and libraries that are funded by local authorities and universities, are eligible for Government Indemnity. Other institutions may be approved as eligible for indemnity cover, but this is not automatic. The scheme makes it possible for individual collectors owning significant works of art to loan those individual works of art and occasionally entire collections to museums and galleries. If the scheme were not available, the majority of those museums and galleries would not be able to afford the commercial insurance policies that would be required and therefore the works of art would never be on public display – to the detriment of the cultural life of the country. As the indemnities are effectively undertakings and contingent liabilities in accordance with the 1980 Act, there is a concern that the effect on the national balance sheet of a smaller overall national economy – such as that in an independent Scotland – might cause the government of an independent Scotland to withdraw or significantly reduce the scope of the Government Indemnity Scheme. Cultural gifts scheme
The cultural gifts scheme was introduced by the Finance Act 2012. It provides that a reduction will be applied to an individual’s tax liability when an object has been successfully donated to be held for the benefit of the public or the nation. The object that is to be donated to the nation must be pre-eminent or associated with an historic building. The donation must be for the benefit of the public or the nation and must be made, registered and accepted in accordance with the scheme.
The scheme shares many similarities with the acceptance in lieu scheme discussed above but there are a number of differences. In particular, the cultural gifts scheme allows donors to gift objects or collections to eligible institutions in the UK during their lifetime in the knowledge that the goods and collections will remain in those institutions, available to the public and maintained in good condition. When the object or collection has been considered and it is assessed as being pre-eminent or associated with a historic building, a fair market valuation will be agreed for the object or collection and a recommendation will be made to the relevant minister (depending where in the UK the object or collection is located). As a result, the scheme makes it possible for individual collectors and owners to transfer culturally important objects or collections to institutions which will display for the benefit of the public and, in return, the individual donor will receive a tax incentive.
Future
Will any or all of these reliefs and exemptions continue to apply in the future? As mentioned above, the Scottish Government’s White Paper simply states that, in the event of a yes vote, the UK tax code will be adopted in full and it will be for the Government of Scotland at that time to consider what changes are to be made. Similarly, in the event of a no vote but increased devolution to Scotland in the realm of taxation, the Scottish Government could be given powers to alter, amend or remove specific exemptions and reliefs from the existing tax code. It is difficult to imagine why the Government would remove reliefs which are intended to encourage individuals to donate culturally significant assets to the nation. However, significant changes to the taxation system are possible in theory and detailed explanations of the way in which various political parties would amend the system have not yet been released. It is not unexpected that these would be released in advance of the September 2014 Referendum. What is likely is that the Government of both the UK and Scotland will come under increasing pressure to deal with reliefs and exemptions which are seen as “loopholes” or easily-manipulated provisions allowing for tax avoidance to take place. We have seen in previous years, as a result of such thinking, an attempt to impose a limit on charitable giving. Although this measure was eventually not put in place, it does demonstrate the kind of action that a Government might consider in order to give the impression that it is taking all the steps possible to reduce abuses of the tax code. Conclusion
It is becoming increasingly clear that there will be a divergence of taxation between Scotland and the rest of the UK irrespective of the outcome of the Referendum in September. Scotland has historically been a left-leaning society politically. This could result in higher headline rates of tax but it could also result in more generous reliefs to encourage charitable giving. The exact way in which this will manifest itself remains to be seen. There seems to be no reason to panic at the moment. It will be important, however, that the statements of the various political parties and the progress of the Referendum campaigns are monitored closely. This is particularly true where an individual, a collector or his or her advisors are dealing with assets either side of the border and where there are assets on loan between cross-border institutions. The only certainty at the moment seems to be that the debate will continue and that the outcome will be significant for individuals, institutions, advisors and other professionals.
Where there are specific queries on any matter discussed in this paper in the run up to the Referendum, professional advice should be sought at the earliest possible opportunity. This is true, even where the advisor is not able to give definitive advice one way or the other. It is important still to be aware of the “grey areas” so that all decisions are taken in full cognisance of all of the available facts. In these circumstances, it will be important for clients to have up-to-date valuations of any individuals items or collections which may be affected.
www.turcanconnell.com For further advice on the tax issues raised in this Bulletin, please contact Turcan Connell: Alexander Garden – 0131 228 8111 – [email protected]
or
David Welsh – 0131 228 8111 – [email protected] To instruct or discuss a valuation, please contact Pall Mall Art Advisors:
Rachel Doerr – 0845 882 2794 – [email protected] For information about Pall Mall Art Advisors and previous issues of Newsletters and Bulletins please visit our website: www.pallmallartadvisors.com | 