These proposals are set out in the UK Government's Consultation Document which can be downloaded here.

 

Finers Stephens Innocent has a passionate interest in the arts and many of FSI’s clients, including private collectors and public galleries and museums, are potentially affected by the proposals. We shall therefore be responding to the Consultation Document on their behalf.  See below our draft letter which we intend to send to the UK Government's consultation team.

 

In short, the UK Government intends to encourage philanthropy in the arts by ensuring that in return for their generosity donors will receive a reduction in their income tax liability of 25% of the agreed value of the object donated. The first step in the process is for an appointed expert panel to decide whether the object is of 'pre-eminent' quality in order to attract the relief. The second step in the process is for the expert panel to agree a market value for the object. The UK Government proposes to allow the expert panel to determine where the object will be allocated, though it seems to be open to considering the requests of donors in deciding which institutions objects should go. 

 

We would be grateful for your comments on our draft letter and will tailor it where possible to reflect your comments. In addition, we would be pleased to include your name and where applicable, your institution, at the bottom of our letter should you wish to be identified. Please let us know.

 

The deadline for submissions is 21 September 2011. We would be grateful if you could please send us your comments by 15 September 2011 to daniel.mcclean@fsilaw.com.

 

Draft Response:

Question 1: Should the new scheme accept gifts only from individual donors? If so, why? Or should the new scheme be open to other donors including corporate bodies? Why?
 
We believe that the scheme should be open to both individual and corporate donors and not be discriminatory. Many companies possess significant art collections, including, Deutsche Bank, Rothschild and UBS, the latter holding one of the world's most important corporate collections of contemporary art. Corporations should not be discriminated against under the new proposals. (See our response also to Questions 12/13 below).

 

Question 2:  How many donors do you think might be interested in the new scheme?
 
[Our response to this question depends upon how our clients/contacts respond].

 

Question 3:  Do you agree that pre-eminent objects should be defined for the new scheme in the same way as for the existing IHT AIL scheme? If you don't agree, what criteria or guideline would you add to, or exclude from, the list, and why?
 
Absent the development of an alternative scheme we agree that the IHT AIL scheme would be the best starting point. However, when looking at previously accepted AIL pre-eminent objects, there appears to be a strong emphasis on traditional works of art. We question whether the new scheme is similarly biased towards traditional objects and works of art at the expense of contemporary and modern artefacts. 

 

In order for the IHT AIL scheme to accept an object as being pre-eminent it must meet the Waverley criteria. The criteria put in place by the Waverley Committee were established more than 50 years ago and the export system relies on this to assess whether an object should be granted or denied an export licence. The National Art Collections Fund for example, released a memorandum in 2006 which argued that the Waverly criteria are out-dated and unrealistic although it didn’t go as far as proposing an alternative approach.

 

There are also other concerns. For the new panel of experts who will select the objects – will there be an equal number of specialists for each given art historical period?

 

Question 4:  What kind of objects might persons be interested in donating under this new scheme?
 
We believe that any moveable object should be considered if it meets the set criteria.

 

Question 5:  If you think the new scheme should not be operated on a first come, first serve basis, please explain why. If not on a first come, first serve basis, how do you think the expert panel should prioritise the offers of gifts of pre-eminent objects if the value of the gift is over the annual limit?
 
There are two possible ways for the expert panel to prioritise gift offers. First come, first serve vs. reviewing objects over a set period of time. The latter method appears to ensure quality. However there are problems with this method. Is it fair on donors to expect them to wait when they may be aiming towards a specific tax exemption? There is more danger of donors withdrawing their offers if they have to wait for a set period of time to understand whether the tax relief will be available to them. Time limits for the payment of tax become a complex issue and the level of uncertainty may discourage donors. In our view, a first come, first serve basis is more practical for all of those involved.

 

Question 6/ 7:  What institutions should the object be loaned to? Should this differ from the institutions that can currently be allocated objects under the existing IHT AIL scheme, and if so, why? Do you agree the expert panel should follow the AIL process when it asks for applications for interested institutions for the allocation of an object? If not, what processes should be used?

 

Currently the IHT AIL scheme sees all objects that are accepted allocated by the Secretary of State to a public institution to ensure that public access is guaranteed to as many people as possible. These institutions are largely museums, galleries and libraries which are appropriate institutions for the placing of objects in the new scheme. Donors can request that their object is allocated to a specific institution. The AIL panel tries to accommodate this request. If an offer is made without a request, institutions are invited to make an application for the object. Due to the charitable nature of the new scheme, it is likely that donors will be looking to form relationships with their choice of institution and will want their own interests to be met by the expert panel. We believe that the allocation of objects should follow the IHT AIL scheme but that it could go even further to ensure that objects are allocated to institutions designated by donors providing the designated institution is in agreement.

 

Question 8:  What other conditions should be attached to the lending of objects? What level of public access should there be? How should public access be ensured?

 

We believe both the wishes of the donor and the institution need to be considered here. We question how commercially viable public access always is for an institution with regards to insuring an object on loan, particularly if the object is of a high value.

 

Question 9: What rate of an object's value do you think would be sufficient to encourage donors to give objects to the nation, and why?

 

 We believe that the UK Government's 25% proposal is a breakpoint. Anything below this rate, from a donor's perspective has little benefit. Rising above 25% and heading towards 30% ensures the amount of objects accepted by the panel would be fewer.  Living artists have the potential to be attracted to the scheme, particularly eminent figures such as Damien Hirst. This scheme could be a way of encouraging prominent contemporary artists to donate which in turn will allow them to satisfy their tax liabilities.

 

Question 10:  If people other than individuals are eligible to make a donation under the new scheme, for example corporate bodies, should a different rate of reduction be used? If so what should the rate or rates be, and why?

 

We believe there should be different rates of reduction put in place by the UK Government. Companies often pay a lower rate of tax – with a 25% reduction having the potential to clear them of a large proportion of their yearly rate. This discriminates against individual donors. We believe a 15% reduction is a suitable starting point for corporate donors.

 

Question 11: Should the tax reduction available on each individual object be capped? If so, what should the cap be, and why?

 

Rather than impose a cap on the amount of tax reduction per object, an alternative and more suitable cap would be to restrict donations to one item per year per donor.

 

Question 12/ 13: Should a cap be placed on the amount of tax reduction available per donor? If so, what amount? What difference do you think it would make if there was no cap on the overall relief available under the new scheme?
 
There should not be a cap on the amount of tax reduction available to each donor. This will be a strong disincentive and would risk donors selling rather than donating pre-eminent objects.  However donors may also come across difficulties when attempting to sell with regards to the Waverley criteria and potential exportation difficulties. In these instances the scheme would benefit.

 

We believe the scheme is less likely to appeal to individuals who want to gain a large financial sum quickly. With regards to corporations – the scheme is more likely to appeal to private companies rather than to public companies as shareholders in public companies may object to their directors giving away the company's valuable assets. 

 

Question 14:  Are there any other ways of accommodating gifts of very high value?

 

Not in our opinion. 

 

Question 15:  Impact on individuals and households – the Government would welcome information from advisers or their representative groups about how likely they are to promote this measure and what they expect the take up and the value of the objects donated might be.

 

Our response to this question depends upon how our clients/contacts respond.

 

Question 16:  Impact on business and the third sector – the Government would welcome information from advisors or their representative groups on the impact of this measure on charities, museums and other institutions.

 

Input should be sought from charities to understand if this scheme is likely to be commercially workable for them. Charities are unlikely to make a donation as the income tax reductions are not relevant to them.  They are more likely to be concerned to understand the practical implications of applying for a loan of a donated object.  A charity may prefer to receive a direct gift of an object from a donor rather than borrowing the object through the proposed scheme.  Consequently, we would assume that charities are going to be largely unaffected. Finally use of the word 'charities' appears to be too general.

 

Summary

 

In our view and in the view of our clients, the proposed scheme is a valuable first step in encouraging lifetime donations of pre-eminent artworks and objects to the British nation.

 

However, we would also urge the Government to increase the amount of proposed relief available, which is currently set at £20 million per year only. Furthermore the proposed relief is to be shared with the existing AIL scheme which means in that in practice the total value of the scheme will be roughly equivalent to £10 million per year only.