Conditional exemption for historic buildings and outstanding landscapes

Landowners appreciate the need for careful succession planning to ensure that, as far as possible, the estates they pass on to the next generation are viable for the future.

Much of the guidance on succession planning focuses on Agricultural Relief (APR) and Business Relief (BPR) and it will almost always make sense to apply for APR and BPR, where these reliefs are available because they are absolute: once granted the assets have effectively passed to their new owners free of tax.

Landed estates, however, often have a mansion house and park at their heart, which will not be relievable because they are unlikely to qualify as business assets and are not usually used for agricultural purposes. HMRC recognises the importance of preserving a house and park as the focal point of an estate and offers conditional exemption (CE) as an alternative tax break.

Outstanding land and buildings

As is often discussed, CE is available for artworks and significant cultural assets, but CE is also available for the following:
outstanding historic buildings;

• land essential to protect the character of historic buildings;
• amenities and objects historically associated with such buildings; and
• land of outstanding scenic, historic, or scientific interest.
  
  

If the mansion house is listed, it will usually qualify for CE under the first category. The gardens and park surrounding an historic house might also be eligible under the second category, particularly if they are essential to preserving the character of the house and any views of it. In addition, an estate village, whether designed at the same time as the house or created over many years, might give the house important scenic context, and may qualify under either the second or third categories.

Some of the house’s contents might qualify for CE on their own merits but the rest of the collection (pictures, furniture, porcelain etc) may qualify under the third category if it has been associated with the house for more than fifty years.

The fourth category includes land important for botanical, horticultural, archaeological, or physiographic reasons, as well as ecological features and man-made landscapes. Such land will ordinarily qualify for CE if it is within a National Park, Area of Outstanding Natural Beauty (AONB) or Site of Special Scientific Interest (SSSI), but there may be land that is not designated but will also qualify. Buildings and monuments in outstanding landscapes may qualify on their own merits (under the first category) or because they augment the landscape.

Maintenance and public access

In return for CE, the landowner undertakes to HMRC that it will maintain the land, building or its contents and to permit reasonable public access. Undertakings will be appropriately tailored to each case, but the starting point is an expectation that the owner will preserve the land, building or collection and keep it in good repair.

Landowners are not expected to “enhance” property subject to CE and there is no requirement to, for example, lay new footpaths or restore derelict buildings, but they should take steps to ensure that existing access routes can continue to be used and that the condition of any structures does not deteriorate.

In terms of public access, the starting point will be that it is required for three months every year for outstanding buildings, but this can be reduced if public access would damage the building or increased if owners are already offering public access or if the value of the exemption being sought is significant. Owners are entitled to charge a reasonable entry fee.

For outstanding landscapes, it might be appropriate to limit public access at certain times of the year (such as shooting or breeding seasons) but otherwise, open access to designated rights of way will be expected. Landowners may also be asked to demonstrate that there is adequate infrastructure for public access, such as car parks, litter bins and bathroom facilities.

Before granting CE of outstanding land, HMRC will usually expect to see a Heritage Management Plan. This demonstrates that the landowner knows what is expected of them and has the resources in place to keep their undertakings. Once agreed, the Heritage Management Plan will be used as the criteria against which CE property is inspected and assessed by the relevant heritage body (for example, Natural England for land or English Heritage for buildings). The relevant body will inspect at least every five years to ensure that the undertakings are being kept.

Maintenance Funds

HMRC recognises the costs involved in preserving CE property and giving the public access to it and allows landowners to set up a Maintenance Fund (a trust to maintain CE property) to help defray them.

Unlike with most new trusts, there is no Inheritance Tax (IHT) or Capital Gains Tax (CGT) on income-generating assets (for example, let residential properties) going into a Maintenance Fund as long as the income will be used to maintain CE property.

If properly managed, Maintenance Funds can shelter income-generating assets from capital taxes and provide an income to maintain the estate. It is beyond the scope of this article to go into further detail, but landowners should note that Maintenance Funds are subject to a series of qualifying conditions that require careful consideration.

Losing conditional exemption

Once CE is granted, it remains in place until the next IHT event (be that a death, a gift, or a periodic charge on a trust fund) when it can be renewed or not, as desired. The exemption will also end if CE property is sold or if the owner breaches their undertakings. For example, if they do not adequately maintain the property or if they are unable to give reasonable public access. When CE ends there is a “recapture charge” and IHT is charged on the then market value of the land or object at the rate that would have been charged when CE was granted.

For this reason, the long-term plan for land and buildings should be considered. If land is given CE and the owner subsequently wants to develop it, the market value for a recapture charge will include “hope value” as well as that of the land itself. CE may also restrict newer environmental land uses, whether under the publicly funded Environmental Land Management Schemes, or provision of statutory offsite biodiversity net gain or private environment schemes. If there are plans to develop or explore innovative environmental schemes, CE may not be appropriate as a recapture charge
in due course may be more than the up-front IHT charge.

CE is an important succession planning tool for landowners who are able to meet the conditions of maintenance and giving public access, but it is a long-term commitment, and its implications should be thought through carefully before it is sought.

This article is part of the Rural Estates Newsletter 2024, click here to read.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2024