With the continued freeze of the inheritance tax nil rate band set to continue for a few more years (£325,000 until April 2021 at least) now is the time to make sure that all other reliefs and exemptions are fully explored. One of these is the little known but potentially very useful exemption known as the "conditional exemption".

This was introduced by the Government to preserve property that is considered important to the nation's cultural heritage for public benefit, while allowing for private ownership to be retained. The key benefit for families is that ownership of property and land can pass from generation to generation in a family without having to sell up to settle inheritance tax (IHT). However, as indicated by the name, this is a conditional exemption and therefore there is some give and take.

What property qualifies?

The conditional exemption applies to "heritage property" - buildings and other assets that have pre-eminent national, scientific, historic or artistic importance. To be specific, heritage property in the land and buildings context must be one of the following:

  1. land of outstanding historic, scenic or scientific interest;
  2. buildings of outstanding historic or architectural beauty or interest;
  3. land considered essential for the protection of the character and amenities of such buildings; or
  4. objects historically associated with such buildings (for at least 50 years).

Heritage property also extends to any object or collection of objects (pictures, prints, books, manuscripts, works of art or scientific objects), that is/are considered to be pre-eminent in its own right.

How does it work and what is the tax benefit?

The exemption must be claimed and if the heritage property meets the criteria, specific undertakings are given to HMRC, including: allowing public access (usually around 28 days a year); retaining the property in the UK (easy for land and buildings); and preserving and maintaining the property. In return, an exemption from IHT is granted, conditional upon fulfilling the undertakings agreed. The exemption works as a deferral of an IHT charge that would otherwise be due on transfers of qualifying property on death, on lifetime transfers of property if the donor dies within seven years, or on gifts to trust.

The relief also extends to capital gains tax that could arise in the case of a lifetime gift or transfer to a trust. Similar to IHT, the relief must be claimed.

How do you claim?

An application is made to HMRC within two years of (1) the gift of the property to trust, (2) the donor's death for failed gifts, and (3) transfers on death to the beneficiaries of the deceased's estate. HMRC may allow for a longer period in certain circumstances.

HMRC will involve an advisory body, such as Scottish Natural Heritage for outstanding land, or Historic Scotland for historic buildings, for guidance on whether or not the property meets the criteria. If it does, then negotiations will begin over the terms of the undertakings. The undertaking can be renewed if the property changes hands.

Breach of undertakings

On a material breach of undertaking, such as the failure to allow public access or if the property is sold, IHT (and capital gains tax) will become due on the current value of the conditionally exempt property.

Where can I find the details of heritage property?

If you would like to see if there are any properties available to view in your area, you can search on HMRC's website.

Is it for you?

The exemption offers a gateway for qualifying property to pass through generations without having to pay an IHT bill but for it to work there must be a commitment to the conditions agreed with HMRC. It is not a light touch relief but it could generate big savings for families and future generations.

If you have any questions, please do not hesitate to get in touch with your usual Brodies contact.