Conditional Exemption: Inheritance Tax Relief for Heritage

What is conditional exemption?  

Conditional exemption is a temporary exemption from inheritance tax on national heritage property. This exemption lasts as long as the owner looks after it in the UK, guarantees public access to it, and does not sell or otherwise dispose of it. A tax charge arises if any of the conditions ceases to apply.  

The death of the owner is a ‘chargeable event’, but the exemption can be renewed if the new generation specifically agrees to continue the arrangements with HMRC. 

There are five categories of heritage assets which could qualify for conditional exemption:   

(a) any relevant object (or collection of objects) which appears to HMRC to be pre-eminent for its national, scientific, historic or artistic interest;   

(b) any land which in HMRC’s opinion is of outstanding scenic or historic or scientific interest;   

(c) any building for the preservation of which special steps should in HMRC’s opinion be taken by reason of its outstanding historic or architectural interest; 

(d) any area of land which, in HMRC’s opinion, is essential for the protection of the character and amenities of such a building as is mentioned in paragraph (c); 

(e) any object which in HMRC’s opinion is historically associated with such a building as is mentioned in paragraph (c).  

An owner will agree with HMRC and the relevant arms-length expert body (e.g. Historic England, Cadw, Historic Environment Scotland, etc) a Heritage Management Plan, and a minimum number of days that the heritage will be made publicly accessible. Together, these are known as the ‘undertakings’.     

A list of conditionally exempt assets can be found via HMRC’s website here.   

When was it introduced, and why?  

The concept of ‘exemptions’ for works of art has existed since the late 19th century. Originally introduced in 1896 to attempt to stem the flow of significant / outstanding artworks to foreign buyers, some works of art were exempted from death duties in return for owners guaranteeing not to sell them.    

It was in 1975 that the then Labour Chancellor, Denis Healey, brought in conditional exemption, in an attempt to provide a more supportive fiscal framework for the custodians of heritage. Speaking in the House of Commons on 21 January 1975, during the debate on Capital Transfer Tax, Healey told MPs this was not an issue for ‘a party battle’, adding: 

‘The last thing I want is for the tax to operate in such a way that this vital national heritage is dispersed rather than made available. […] We should require not only an assurance of reasonable public access but guarantees against disposal of the contents of the houses, because the value of the house consists quite as much in the ability to see the contents in situ in their historic position as in the architecture itself.’  

Conditional exemption covered not just works of art, but land and buildings too – and ensured guarantees around public access for the first time.   

Since then, around 300 owners have entered into conditional exemption arrangements with HMRC. This has not only facilitated far greater public access to national heritage, but helped keep houses, collections and land together (maintaining their significance in doing so), and ensured their maintenance and upkeep at the expense of private individuals, rather than public money. 

How effective is the scheme?  

Very. 

Of the approximately 300 houses with conditional exemption arrangements, around half are members of Historic Houses. We hear regularly from owners just how vital conditional exemption has been in helping them continue to maintain nationally significant heritage, and how it has driven them to provide public access to buildings and collections in particular.   

Our own analysis found that 90% of the 150 or so conditionally exempt Historic Houses places open for more days than those stipulated in their undertakings – and of that number, around two thirds open for significantly more than they are obliged to.   

Conditional exemption is a great example of public-private partnership. It is extremely cost-efficient for the government to encourage private owners to take on the financial obligations that come with the care and upkeep of heritage, and the scheme not only does this, but also obliges those owners to guarantee public access.   

In recent years, HMRC has typically forgone c. £40 million per annum (gross) in revenue because of new conditional exemption claims. Conditional exemption agreements now cover around 38,000 works of art and historic objects, and around 300 historic houses.   

By comparison, the National Gallery costs the taxpayer c. £33 million annually in direct grant-in-aid to care for 2,400 works of art. Conditional exemption is a cost-effective deal that protects the UK’s cultural landscape.  

Economic analysis done by Historic Houses and the Country Land and Business Association (CLA) suggests that conditional exemption is cost neutral to HM Treasury. The VAT, income tax and National Insurance it generates through jobs, repair works and public access amount to around £40 million a year, negating the forgone revenue. And that is before counting visitor spend in local economies.