The UK “acceptance in lieu” scheme: How to trade a painting for a tax break

Once the curtains come down and the main cast is gone, the Tax Man takes his final leap on stage. The denouement: Inheritance Tax (IHT).

When the Tax Man comes knocking, demanding settlement of IHT, a few options are available to the heirs: sell, liquidate, or offer the art to the nation. This last option is possible under the Acceptance in Lieu (AIL) scheme allowing the Tax Man to receive its due without a single gavel falling at auction.   This option is likely to be used more often now that this government has drastically reduced the availability of business property relief.

Advantages for the Heirs

Let’s imagine you are newly burdened with the sprawling estate of your late, art-obsessed great-uncle. Along with his collection of 19th-century portraits, first-edition manuscripts, and an alarming number of gilded clocks, he has left you with a hefty inheritance tax (IHT) bill of £11 million — and, rather inconveniently, very little liquid cash to pay it.

You have to move fast as IHT must be paid within six months of a death or interest will start accruing, currently at 7.25%.

After much handwringing, you decide to sell off a painting by J.M.W. Turner valued at £10 million, to settle part of the tax. Under standard inheritance tax rules (for simplicity, we do not address Capital Gains Tax and sales costs), the sale on the open market would play out as follows:

• Open market value: £10 million
• Less: 40% of the painting’s value (£4 million) for IHT attributable to the painting.
• Net proceeds: £6 million.

With the £4 million attributable to the painting settled, you are able to pay off an additional £6 million using the net sale proceeds. However, you must find an extra £1 million to settle the residual IHT bill.

Say that, instead, you offer the painting in lieu of tax. Under the Acceptance in Lieu scheme, an additional “douceur” (a sweetener) is applied.   The “douceur” is an extra 25% of the IHT that would have been payable, with the result that the painting has, in our example, a tax settlement value of an extra £1 million. An object is, therefore, worth more if it is offered in lieu of tax than if it is sold on the open market and the IHT is paid using the sale proceeds.  This is how the AIL scheme works:

• Open market value: £10 million
• Notional IHT: 40% of the painting’s value = £4 million
• Value of the painting for IHT purposes: £6 million (open market value of £10 million less notional IHT of 40%), plus a credit of 25% of the £4 million (the “douceur”) = £1 million, amounting to a total value of £7 million.

By gifting the painting in lieu of IHT, you settle your £11 million IHT bill in full, as opposed to settling only £10 million if you sell the painting on the open market and use the sale proceeds to pay your IHT bill.

How It Works

Step 1: The Offer

You, as the executor of the estate, must submit a formal offer to HMRC’s Heritage Team, proposing the Turner in lieu of your tax liability. You must show that the painting is:

• Culturally significant (i.e., "pre-eminent").
• In acceptable condition.
• Valued at fair market price.

Interest (currently at 7.25%) on the amount of tax settled by the offer will normally stop running from the date the offer is registered with HMRC.

Step 2: The Panel Decision

The Arts Council’s AIL Panel — a committee of museum curators, historians, and valuation experts — reviews the submission. They determine:

• Whether the painting qualifies as pre-eminent.
• Whether its market valuation is accurate.
• Where it might be best placed within the nation’s collections.

Step 3: Ministerial Approval & Tax Settlement

Once the AIL Panel signs off, the proposal is forwarded to the Secretary of State for Culture, Media, and Sport, who makes the final call. If accepted:

• HMRC applies the full tax credit (the “douceur”) to your bill.
• No money changes hands — just one masterpiece moving from private to public ownership.

Step 4: Public Allocation

Your Turner is now the property of the nation. The National Gallery, Tate Britain, or another leading institution becomes its custodian, where it will be displayed for at least 100 days.

• You can express a preference ("I think Tate Britain would be ideal"), but the final decision prioritises public access and curatorial need.
• If the work has a historic connection to a specific place — say, a portrait of a former Duke of Devonshire — it may be allocated to a regional museum or stately home collection.

HMRC cannot ‘give change’ if the tax credit generated by the gift in lieu is greater than the IHT payable. However, a public body may be able to pay the difference if the offer is made conditional to that body. This is known as a “hybrid offer”.

Why AIL Has Become a Lifeline

Historically, artists’ estates had a useful trick up their sleeves: Business Property Relief (BPR), which allowed them to classify their unsold artworks as business assets—thus avoiding IHT altogether. That is no longer possible for some estates.

The 2024 Budget introduced a 20% IHT charge on business assets over £1 million, meaning that artists’ families are suddenly facing substantially larger tax bills. This shift has made AIL not just a useful mechanism but an essential one for artists whose art qualifies for AIL.