The Bishop, the Vase and a Will

14 Feb 2012

Anyone who watches TV shows such as Antiques Roadshow, Cash in the attic or Flog-It will realise that every now and then a person’s dusty vase in the attic, inherited from granny is actually worth a small fortune. Often people have no idea what an item is actually worth and it takes a expert valuer to point out how special a particular item is.

Most people like to make gifts of their personal possessions either on death or on downsizing and the decision to gift a particular item tends to be for sentimental rather than value reasons. Yet not realising the true value of an item can lead to family division as well as adverse tax consequences. A case last year involving the Bishop of Grimsby and a Chinese vase highlights the risks of not having an up to date valuation.

Jennifer Watson had grown up with the Chinese vase since childhood where it had sat on a shelf in her aunt’s house. Her aunt had always assured her that she would inherit the vase on her death. In her Will she left all her personal possessions to her executors with the request that they distribute the items in accordance with a non-binding letter of wishes. The letter contained the request to pass the vase to Jennifer. On the Aunt’s death in March 2011, the executors which included the Bishop of Grimsby, arranged to have the contents of the house valued. The valuer identified the vase as having been made in the 18th century for the court of Qianlong Emperor and was once in Beijing’s Forbidden City. As a consequence instead of being worth a few thousand pounds, as everyone thought, it was in fact worth £9 million. If the executors had proceeded with the gift free of tax to Jennifer then the rest of the estate would have faced an inheritance tax bill of some £3.6million. Instead they decided to disregard the letter of wishes, sell the vase and distribute the proceeds amongst the residuary beneficiaries. One of whom was the Bishop. Jennifer strongly objected and it was a matter of days before the sale and the threat of a full hearing at the High Court that a settlement was finally reached. The Bishop felt that the settlement reached allowed for all members of the family to benefit and not just the chosen niece.

If you are considering leaving an heirloom in your Will you need to decide whether to make an outright gift of the item either free or subject to inheritance tax or leave the item to your executors to distribute in accordance with a non-legally binding letter of wishes. The former will guarantee that a specific item is given to the chosen beneficiary and the latter will give greater flexibility to your executors to take into account unforeseen circumstances.

If you are confident that you have no further use for a particular item perhaps because you are downsizing then it is important to consider not only the inheritance tax but also the capital gains tax consequences of gifting the item during your lifetime.

For inheritance tax purposes a gift to an individual will not attract any inheritance tax provided that the donor survives seven years from the date of the gift. If he or she does not, then the value of the item will use up part or all of the available nil rate band (the part taxed at 0% and currently £325,000). This will mean that there is less available for the executors of the estate to set against other assets.

Capital Gains Tax is payable on the gain in value on the sale or gift of the item during your lifetime over its costs (or the probate value if it was inherited), less the costs associated with the sale. Special rules apply to exempt from tax any item where the value is less than £6,000. If it exceeds this amount the chargeable gain is limited to so much of it as exceeds five-thirds of the difference between the value or sale proceeds and £6,000 if this figure is less than the actual gain.

There are opportunities to mitigate the tax liability including leaving the item in your ownership until death, as there will be an uplift in the base cost for CGT purposes on death, and bequeathing it to your spouse and securing the inter spouse tax exemption. The surviving spouse can then give the asset to the beneficiary will little or no CGT to pay and provided they survive for seven years there will be no inheritance tax to pay either.

If you are contemplating gifting valuable antiques or works of art on death or during your lifetime it is important that you take proper advice on the taxation implications. It is also important that you have an up to date market value of such items you may wish to leave to another person either during your lifetime or by Will.