Under the right circumstances, there can be substantial financial advantages to an owner who makes a 'heritage sale'. This is due to the 'douceur' arrangement explained below.

1) What Do We Mean by a Heritage Sale?

For our purposes, a heritage sale is a sale by private treaty to one of the bodies listed in Schedule 3 of the Inheritance Tax Act 1984 or the acceptance of a work of art by the Government in lieu of tax.

2) Sale by Private Treaty

The effect of such a sale is that it does not provoke the charges to tax that would arise if an owner were to sell on the open market. The sale is not a disposal for CGT purposes, nor does it breach any undertakings given on conditional exemption from ED, Capital Transfer Tax or IHT. In fact, it is exempt from capital taxes. It is also exempt from Value Added Tax (VAT). It is worth noting that the gross value of a work of art sold on this basis is excluded from an estate if the sale is on death. On account of this undoubted advantage over any other type of sale, it is considered fair that an institution should offer, and an owner accept, a price lower than would be achieved in an open market sale, where the proceeds of sale would be taxable. There is an administrative arrangement whereby what is known as the 'douceur' is brought in to determine this 'special price'. In effect, the purchasing institution and the seller share the value of the tax exemption.

In determining the 'special price', both sides negotiate, as willing buyer and willing seller, an agreed open market value. The potential tax liability is calculated on this agreed value. The 'special price' will usually be arrived at by taking the notional tax away from the agreed open market value, then adding back 25% of the value of the tax exemption - the 'douceur'. Any costs of sale are not taken into account in the notional tax calculation. In the appropriate circumstances, a 'douceur' of more or less than 25% may be negotiated.

For example, take the case of a painting worth £100,000, which has a chargeable gain for CGT purposes of £20,000, and which was previously given conditional exemption from death duties (now IHT) at 40%. The tax computations on a sale would be as follows (assuming no costs of sale):

This shows that in an open market sale, a vendor would receive £57,840 after taxes. By making a heritage sale by private treaty to one of the approved bodies, the vendor is credited with a douceur of 25% of the CGT and 25% of the IHT - in this case a sum of £14,460. The vendor thus receives £72,300 for his painting and the public gallery secures a work of art worth £100,000 for £72,300. Obviously, the greater the tax liability, the greater the advantages of a heritage sale.

It is obviously important to find a qualifying public institution both willing and able (financially) to participate in such an arrangement, and it is usually beneficial to employ experience in this area, not only to negotiate the value and 'special price', but also to identify potential institutional purchasers. MLA will circulate offers and help find likely purchasing institutions if necessary.

3) Acceptance in Lieu of Tax

The calculation is similar where someone surrenders a work of art to the nation in lieu of tax. In our example, the vendor would give his painting worth £100,000 to the nation in lieu of tax of £72,300. The gross value of the painting would be excluded from the estate in question.

However, in order for a work of art to qualify for this special treatment, it must be of a particular importance for the nation's collections. It will be acceptable if it is considered to constitute a "pre-eminent addition to a national, local authority or university collection" in the UK, or is "pre-eminent in association with a particular building".

A work of art can be surrendered in lieu of IHT due but, through some anomaly, not for CGT due.

The offer is made to HMRC and handled by MLA who will obtain necessary advice with regard to "pre-eminence" and value, and make recommendations to the appropriate Secretary of State, who will ultimately decide whether the work of art qualifies and whether the valuation is acceptable. Once the formal offer is made, although the negotiations may take some time, there is a 'freeze' on any interest that may be payable on the estate, provided that the value at the date of the offer is used in the special value calculations, rather than the value at the date of acceptance.

A work of art, accepted in lieu of tax, will be allocated to an appropriate 'home' by the Minister of State after consultation with MLA and other relevant bodies. This is normally to one of the institutional bodies in Schedule 3 of IHTA 1984, but in certain circumstance an allowance may be made for the work of art to remain in situ in the house where it has been, provided considerations such as public access, security and preservation are satisfactory.

It is possible to make an offer with conditions as to allocation attached. It should be noted, however, that if such a condition is thought to be unacceptable by the Minister, the offer may fail even though satisfactory in all other respects.

4) The 'Hybrid Arrangement'

Until 1987, where the special value of a work of art offered in lieu of tax was in excess of the tax liability, no 'change' was given. Now HMRC will accept a part cash/part in lieu arrangement. This precedent was set when the nation acquired Picasso's Weeping Woman from the Collection of Sir Roland Penrose, whereby part of the value was accepted in lieu of the tax due on Sir Ronald's death and part of the value was provided in cash by the Tate Gallery assisted by the National Art Collections Fund and the National Heritage Memorial Fund.

5) What are the advantages of Heritage Sales?

Private Treaty Sale Obviously, a vendor will receive more cash in his hand at the end of the day than he would if he had sold on the open market. The higher the tax that would have been payable, the greater will be the advantage. A sale on death takes the gross value of the work of art out of the estate.

All this, of course, is subject to being able to establish the full market value. This may not be easy in a rising market with an object of great rarity whose like has not been seen on the market recently, or an object that is of greater interest (and value) abroad, for example, Australian pictures or American furniture.

Acceptance in Lieu As stated above, this has the advantages of removing the work of art from account in the estate and being offset against the IHT liability on other assets within the estate as well as the benefit of the douceur arrangement, which allows the tax to be paid in kind rather than in cash.

6) There are two major circumstances when a heritage sale should be considered:

1. Where a work of art has been exempted from tax on a previous transfer from one person to another (whether during a lifetime or on death).

2. Where there are IHT implications on death and the executors are considering selling something and raising money to pay the tax.

7) Further guidance can be found in the booklet "Capital Taxation and the National Heritage" (IR67) and "Finance Acts 1987 Supplement" published by the Board of Inland Revenue. Together these set out the position as it existed following the 1987 Finance Acts.