Representation. A Country that Lives Within its Means: Spending Review About the Heritage Alliance. Argument

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1 Representation A Country that Lives Within its Means: Spending Review 2015 About the Heritage Alliance The Heritage Alliance is the largest coalition of non-government heritage interests in England, bringing together 98 independent organisations which are in turn supported by well over 6 million members, volunteers, trustees and staff. Together they own, manage and care for, the vast majority of England s historic environment. The Heritage Alliance s response is based on the principle that heritage assets and the historic environment are a powerful force in the 21st Century which stimulates economic growth and brings multiple benefits to individuals, communities and government. Argument Our heritage continues to secure national economic recovery not only through tourism but also through the construction industry and the creative and cultural industries. The social benefits are increasingly recognised from social cohesion to civic pride and individual wellbeing. The Heritage Alliance makes the case that planning, heritage protection and historic environment services, together with the capacity of communities to shape and care for their environment, should not be singled out as a soft target for further efficiencies, given the huge benefits - economic, social, environmental and cultural - our heritage brings to the country. The Britain is Great Campaign fully recognises the powerful appeal of our heritage in attracting tourists, investment, businesses and students to the UK. The Prime Minister is on record recognising the importance of our heritage in 2010 and more recently in July when he launched the 5 Point Plan to boost tourism across the UK. Here, he mentioned the importance of our heritage as vital part of the attractiveness of the UK to overseas AND domestic audiences. The Chancellor of the Exchequer confirmed in his reply to The Heritage Alliance (31 August 2015) on Fixing the Foundations that the Government is committed both to meeting our housing need and protecting the historic environment. The government is very clear that there is a need to protect our heritage assets. Heritage has the capacity to boost growth and employment in all parts of the UK, supplementing in market towns and rural areas the initiatives that the Government is taking in the cities. DCMS and DCLG are the Departments through which Government discharges its responsibility in protecting our world-class heritage and related services at international, national and local level. HM Treasury invitation to unprotected Departments including DCMS and DCLG to model cuts of between 25-40% will, if implemented, have serious impact on their service quality, capacity and business The Heritage Alliance is a company limited by guarantee registered in England and Wales, Registered No: Registered Charity No

2 models. In turn, that will affect all those who are managing heritage assets and the wider historic environment for public benefit. Recommendations The Heritage Alliance wants to work with Government both corporately and through its membership to contribute to national economic recovery. We will continue to work with Government to support the contribution the historic environment can make to government objectives set out in A Country that Lives within its Means (ACTLWIM). With reference to the aims of that document, we set out our priorities cognisant of the needs of the national economy. Our proposals balance rural and urban interests as well as assets in private, commercial and charitable ownership equipping those buildings and sites for long term economic sustainability. As an England organisation The Heritage Alliance highlights the benefits that would be felt in England but fiscal changes would bring benefits across the UK. 1. Historic England The Spending Review 2015 aims to promote innovation and greater collaboration in public services (ACTLWIM 3.3). For the heritage sector, the most significant innovation and reform (ACTLWIM 1.2) is the new established English Heritage model set up on 1 April Government committed to the supporting the new English Heritage model in its Manifesto. We are concerned that cuts in DCMS budget should not destabilise the other half of the new English Heritage model, Historic England. This was set up with an explicit guarantee from the Secretary of State for Culture Media and Sport that no reduction would be made to its allocated budget of 69.3m for whatever happens more widely ( ). It is essential that DCMS is able to confirm a stable level of funding at 69.3m per annum over the next period for the following reasons: Historic England needs a steady financial context in which to bed-in. The capacity to generate significant income through the properties in care has passed to the English Heritage charity. Further opportunities to become entrepreneurial are therefore limited making Historic England much more vulnerable to reductions in Grant in Aid. Historic England supports Local Authorities in the planning process. Unless Grant in Aid support for Historic England is maintained at or above the current level it will not be possible for it to provide the uniquely impartial expert advice that Local Authorities need to maintain heritage protection services or to owners of nationally important heritage. DCMS funding to Historic England is a commitment to the nation s heritage for public benefit as well as investment with significant multiplier effects. This spend guarantees that a far greater impact is made by Historic England by working through others and in partnership to achieve its aims. Historic England s business model of engagement with wider organisations and stakeholders makes it the lynchpin for the heritage sector and for the future of our heritage, making it critical to the national economy. The Heritage Alliance is a company limited by guarantee registered in England and Wales, Registered No: Registered Charity No

3 In line with promoting innovation and great collaboration in public services (ACTLWIM 3.3), we also draw attention to the role Historic England has and will play in Heritage2020, the new framework that sets out the shared strategic priorities for organisations working together to maximise the public benefit of the historic environment in England. 2. Planning reform Fixing the Foundations: The Government s Productivity Plan implies that planning is a barrier to development. We do not believe that the planning system acts as a brake on development but instead guides appropriate development in appropriate areas. The National Planning Policy Framework confirms the Government s commitment to sustainable development recognising that consideration of the historic environment is necessary to achieve development that is genuinely sustainable. We accept in principle a reasonable degree of relaxation in planning controls but with proportionate and appropriate safeguards for designated and undesignated heritage assets. The Heritage Protection Reform Group, operating under the top level sectoral body, the Historic Environment Forum, is working with Government on a range of options from which we expect constructive proposals to emerge consistent with the Government s approach. The crisis in resourcing for historic environment services in Local Planning Authorities is well known and we support new forms of partnership and collaboration. There is, however, widespread alarm that if Local Authorities continue to cut heritage more than other services there will be a breakdown in effective heritage protection. The result will be inappropriate development of historic buildings, unauthorised damage and possibly increased legal liabilities. Economic recovery needs to be facilitated, not frustrated, by over-stretched officers or the failure of a local authority to provide adequate planning information and advice. Professional planning advice and a well-maintained Historic Environment Record are critical for local economic growth and development, by allowing commercial firms to meet statutory requirements more promptly, for specialists to provide an early indication of the impact on heritage assets, and help to prevent wasted applications, unmanaged risk (and compensation), and to minimise unplanned costs and delays to development. The long term consequence of inappropriate development and unauthorised damage will also be felt in reduced tourism returns both to attractions and in areas where the heritage forms the backdrop for visiting; in reduced investment and confidence in the area; and in a poorer quality of life for residents and workers. The performance and citizen experience of public service (ACTLWIM 2.3), specifically in delivery of historic environment protection, is at a low ebb. The heritage protection regime is in danger of being flouted, ignored and falling into disrepute. Sufficient resources are needed to deliver the Government s commitment to empower local places with the tools they need to drive economic growth (ACTLWIM 3.17). With Local Authorities increasing discretion over budget allocations, we urge the Government first to seriously review its grant in aid to DCLG to avoid these risks outlined above and second to make a strong statement in favour of the historic environment to encourage Local Authorities to reassess their spending priorities. The Heritage Alliance is a company limited by guarantee registered in England and Wales, Registered No: Registered Charity No

4 Recommendations 1 and 2 support the key objective in ACTLWIM 3.1 to deliver public services in a modern way that meets people s expectations about decisions that affect them and their communities. 3. Putting heritage to work This Government has played its part in safeguarding our heritage by restoring the share of Heritage Lottery Fund, by pioneering and funding the new English Heritage model, by increasing financial support to Cathedrals and historic places of worship, and more recently extending the Coastal Communities Fund. All these measures show that Government understands that a positive framework empowers others to take on more, real responsibility. However, these measures have not been available to key parts of the heritage which are now in priority need and which have particular contributions to make to the Government s wider economic and social objectives for urban and rural areas. In line with rethinking the shape of the state (ACTLWIM 1.2) and a strategic approach to spending (ACTLWIM 3), we suggest that commercial, private and charitable owners could take on a greater level of responsibility for our national heritage if the following changes were made to existing measures. Heritage owners need to be able to fix the roof when the sun is shining (ACTLWIM Foreword) too. In some cases, this is what they actually need to be able to do, to equip their assets to give the public the opportunity to enjoy these unique assets. Helping owners to help themselves would boost tourism, growth and employment in rural as well as urban areas. 1. Extending the Building Property Renovation Allowance to buildings formerly in public service - a measure to facilitate the aim Government reduces the size of its estate (ACTLWIM 2.7 and 3.29) without losing historic, landmark buildings. 2. Realigning the legislation applying to Heritage Maintenance Funds - a measure to support improvements to productivity across the regions (ACTLWIM 3.14) and sustainable economic growth for the long term (ACTLWIM 3.13) 3. Establishing a scheme similar to the Listed Places of Worship Grant scheme for designated assets owned by charities - a measure that, with more and more charities involved in public service delivery, will facilitate options to reform the markets that deliver public services (ACTLWIM 3.23). The Heritage Alliance commends these three proposals to the Government; they are set out in more detail below. The Heritage Alliance 4 September 2015 The Heritage Alliance is a company limited by guarantee registered in England and Wales, Registered No: Registered Charity No

5 Contact Kate Pugh Chief Executive The Heritage Alliance 10 Storeys Gate London SW1P 3AY BUSINESS PREMISES RENOVATION ALLOWANCE PROPOSAL 1.2 About BPRA Many historic buildings in deprived areas lie vacant and are in a state of disrepair. Often the areas have experienced a spiral of economic depression and have high unemployment rates, little opportunities for residents and cannot attract investment. The Business Premises Renovation Allowance (BPRA) is a government financing scheme for the renovation of vacant commercial property in deprived areas into business premises. The scheme provides 100% tax relief on certain costs (capital expenditure on conversion, renovation and repair) incurred and will run until April By facilitating the renovation of historic disused buildings into commercial premises, the BPRA creates jobs and opportunities for local residents, attracts further investment and brings more money into the local economy. In essence, the BPRA is intended to kick-start economic regeneration in these deprived areas, turning them into hubs of commercial activity. Qualification criteria To qualify for the Allowance, a building must satisfy the following criteria: Qualifying buildings are unused commercial buildings or structures that have been unused for a year immediately before conversion or renovation began. The last use must not have been as a dwelling. The building must be wholly or partly in a disadvantaged area. Qualifying business premises is a qualifying building that is to be used or available for use as a commercial building (i.e. for the purposes of a trade, profession or vocation or as offices) for trades other than those listed exemptions (fisheries and aquaculture, shipbuilding, coal and steel industries, synthetic fibres, production of agricultural products, diary production). After renovation, the building must continue to be used as a business premises Qualifying expenditure is capped at 20 million and must be met with match funding. Loosening the qualification criteria and associated benefits for Her Majesty s Treasury The BPRA has had a positive economic and social impact on the areas it has invested in; it has bolstered local economics through bringing together public and private funding to unlock regeneration opportunities in underinvested areas. It has also increased revenue for Her Majesty s Treasury (HMT) the transformation of disused buildings into commercial hubs creates job opportunities and subsequently increased taxes, rates, National Insurance and VAT are paid to HMT.

6 The extension of the Allowance through loosening the qualification criteria would enable more disadvantaged areas to be transformed into commercial centres, and this would also significantly increase the amount paid to HMT each year. The proposed amendments to the scheme are listed below: Open the BPRA to premises (including listed buildings) that have been/are in public ownership and which were used for the provision of public services, but which are to be transferred out of public ownership e.g. court houses and libraries. Each of these proposals are addressed in turn in the Case Studies section, where the economic benefits of the proposal, and the opportunities missed by not extending the scheme are explored. Estimated costs of the proposal Assumptions In order to estimate the costs of the proposed amendments to the BPRA the following assumptions have been made: Current costing of BPRA to the Exchequer The Treasury s Budget 2011 policy costings estimated that in around 300 companies and unincorporated businesses claimed the allowance in relation to expenditure of around 90 million.1 Tax return data for revealed that its cost was at 95m. 2 As there is no information available for more recent years the costs has been based on the static Exchequer impact, which is calculated by multiplying the tax base by the appropriate average effective tax rates. Exchequer impact ( m) Impact The amendments to BPRA under the Finance Bill 2014 were expected to have a negligible impact on the Exchequer. The changes simply clarify the expenditure qualifying for BPRA, to target the relief more effectively. In particular, they deter transactions that attempt to exploit BPRA inappropriately, or that run the risk of breaching State aid rules. Summary of Impacts Year HMRC, HMT & DWP, March 2011, Budget 2011 Policy Costing 2 Adam Palin, 19 December 2014, Property scheme investors face tax demands for FT

7 Exchequer Impact ( m) negligible negligible negligible negligible negligible For the purposes of this document we have assumed an annual cost of BPRA to the Exchequer of 95m per year. Additional proportion of building stock (currently excluded) The overall building stock in the UK comprises about than 4.5 million buildings 3, with more than 606 mil. m² floor area, of which around 85% (43% of floor area) are in residential and office buildings. The public building stock in the UK could be estimated at 86,450 buildings 4, including listed buildings, comprising mil. m². Public buildings therefore represent 1.9% of the total building stock in the UK. Summary of cost Assuming that the cost of BPRA to the Exchequer is proportional to the number of eligible buildings that could benefit from it, the additional costs due to loosening the qualification criteria would amount to: Additional Costs due to opening the BPRA to buildings previously in public ownership: 95,000,000 x 1.9% = 1,805,000 per annum. This costing of the proposed loosening of BPRA criteria doesn t take into account that only a small number of buildings in need of regeneration are both in deprived areas and in public ownership. However given the Government s renewed drive on releasing public assets including buildings we suggest the extended BPRA scheme might cost the Exchequer an additional 5m per annum. CASE STUDIES 4.1. Opening to premises that have not been used for commercial purposes There are plenty of disused heritage buildings falling into disrepair in deprived areas across the United Kingdom. Renovation of these heritage buildings for commercial purposes could be the key to unlocking investment and regeneration in the disadvantaged areas. In many places, heritage buildings are ideal for business premises, and their renovation would be a real game changer for the local area. Their regeneration would also deliver increased revenue to the Government; research by the Heritage Lottery Fund suggests that a business in a historic building in a city is more productive than, and generates around more than a business in a modern building per year. 5 Many heritage buildings such as libraries and town halls are in desperate need for the BPRA as other grants or state aid are limited or unavailable. As focal points for the community, their renovation also Heritage Lottery Fund (HLF) research suggests that commercial businesses based in the historic buildings of cities are more productive and generate more wealth than the average across the whole economy, a heritage premium to be worth around 13,000 per business per year. Pennine Lancashire Heritage Investment Strategy

8 contributes to the Government s aim to regenerate run down high streets. However, they do not qualify for the Allowance as they have not previously been used for commercial activity. The case studies below of Sheffield Old Town Hall and Court House and Limehouse Library highlight the opportunities missed both to the local communities and to HMT by excluding them from qualifying for the BPRA. Meanwhile the Oldham Town Hall case study is an example of a project that is struggling to secure funding, and would benefit from the Allowance. Lastly, the Gaol project is an example of the huge economic impact the regeneration of a public building can have. Extending the BRPA could help communities secure the funding they need for the regeneration of these buildings, thereby transforming local areas and increasing revenue for HMT. Case study Sheffield Old Town Hall and Court House The Grade II building was constructed in 1807/8 and served as the town hall until 1897 when it became the court house. The Old Town Hall has been identified by the Victorian Society as one of their top ten buildings most at-risk. The building is in Waingate, an area with a high crime rate and little economic activity; an area Sheffield Council has earmarked for regeneration. The Old Town Hall is in central Sheffield, close to the shopping and business areas and has strong transport links, making it ideal for business or retail premises. Were it converted, the business rates from such a premise, the tax and National Insurance Contributions that employees would pay, and the VAT paid on goods or services sold would also benefit HMT and, in time, would exceed the amount the Government had spent on the restoration of the building. There is serious concern for the rapidly deteriorating state of the historical building, and strong community support for its regeneration. The injection of money and opportunity that renovation of the building would bring would be a game changer for the local community, however as it has never been a commercial premise, it does not qualify for the BPRA. Case study Limehouse Library The Limehouse Library is located both in a disadvantaged area, and in the St Anne s Church Conservation area a sector of London which the Borough of Tower Hamlets aims to redevelop through the renovation of historic buildings. The Grade II library, built in 1900 would be ideal for conversion into high quality commercial premises, which would attract more investors to the area. The money allocated to the library through the BPRA would be returned to HMT through business rates and council tax, and buyer s VAT on the properties or mortgages. Tax would also be generated through the purchase of goods and services throughout the restoration of the library.

9 Nonetheless, as the building has never been used for commercial purposes, the Borough cannot apply for BPRA to fund the restoration of the building. Oldham Town Hall Oldham, a town in Greater Manchester, boomed during the industrial revolution and its economy became heavily reliant on the manufacturing industry. With the industrial decline many heritage buildings fell into disrepair. Prospect magazine describes Oldham as a town studded with the relics of past industrial glories, empty mills and grandiose Victorian civic buildings. Today s inhabitants can seem like people camping in the ruins of a once-great civilisation. 6 Regeneration of these buildings could help to transform the disadvantaged area and would bring much needed employment opportunities; at times well over a quarter of the workforce was economically inactive. The town is also infamous for its racial segregation problems and riots; regeneration of historic buildings could create hundreds of jobs and social opportunities, and could act as the catalyst for drawing together communities and alleviating the social problems that plague the area. There have been efforts to convert the Oldham Town Hall into a cinema with a restaurant area. The Local Authority, using prudential borrowing are trying to combine this with BPRA to fund the high conversion costs. However the parts of the building that were used as a courthouse do not qualify for the Allowance, while parts that were used for offices do. To allow the whole building to qualify for BPRA would help the Local Authority secure the funding needed to start the conversion. Case Study Gaol Jail, Armagh, Northern Ireland Armagh Gaol was in use from the early 19 th century until around 20 years ago. In the latter half of the 20 th century it accommodated high-profile political prisoners. It has, however, been vacant for the last 20 years and is now on the Built Heritage at Risk Register. The Prince s Regeneration Trust is working with the Council and local partners to secure funding to turn it into a key economic driver of change in the Armagh area. There are plans to convert the Gaol into a 4* hotel with spa and conference facilities, restaurants, apartments, retail units, and a heritage centre. A new public open space would be created for markets and open air events, and 28 high end apartments would also be created within the Gaol. When completed, the Gaol will attract between 35,000-42,000 visitors per year, and make an estimated 4.98m contribution to the economy per annum. The project will create 120 gross permanent jobs, and up to 164 temporary jobs in the wider area during construction of the project. 6

10 The renovation of Armagh Gaol will make a profound difference to Armagh; an area whose deprivation was worsened by the crime and antisocial behaviour linked with dereliction. The project would stimulate further private investment, reducing public expenditure on regeneration in the area. The Heritage Lottery Fund, Council and local council have provided funding and the Government has committed to investing. Were the BPRA to be extended to include the Gaol, the Government would not need to invest as much money as the 100% tax break would attract private investors. Conclusion Extending the BPRA by opening up the Allowance to premises (including listed buildings) that have been/are in public ownership and which were used for the provision of public services, but which are to be transferred out of public ownership would closer realign the Allowance with its aim; to foster the regeneration of deprived areas, by helping to increase private investment, enterprise and employment in deprived communities. Crumbling landmark public buildings blight neighbourhoods, undermine their economic health by deterring investment and damage the confidence of local people. Opening up BPRA to include publicly-owned buildings will help ensure they are restored and re-used, and this will have a catalytic effect on the regeneration of places; encouraging other businesses to move in, raising footfall and creating a virtuous circle of new opportunity, ultimately increasing revenue for HMT. Extension of the BPRA would increase the amount of applicants to the Allowance, and HMT may invest more in the scheme than it had previously. The estimated additional costs, following the assumptions described in this paper, amount to less than 2m. However, when viewed as a long term investment based on the economic potential of the deprived areas, the Government will have much higher returns due to increased commercial activity. Indeed a study by Regenerate Pennine Lancashire found that approximately 20% of visitors to areas that had benefited from heritage regeneration spent more in the area after the investment than they did before, and 25% of businesses claimed that they have increased profits since the regeneration. The survey also found that around 50% of jobs created by historic visitor attractions are not within the business itself but in the wider economy. 7 Extension of the scheme is the key to regenerating more communities, boosting both our local and national economies and increasing revenue paid to HMT for an almost negligible cost to the Exchequer. 2 HERITAGE MAINTENANCE FUNDS PROPOSAL Enabling private owners to support nationally important, publicly accessible heritage, as intended by the original HMF legislation Rationale 1. The proposal would realign the legislation supporting Heritage Maintenance Funds (HMFs) so that once again it would meet the original purpose lying behind the creation of the HMFs regime, to enable private owners of nationally important and publicly accessible heritage to support the conservation of these heritage assets through their own financial resources. By doing so, the proposal would support the fulfilment of government manifesto objectives: 7 Pennine Lancashire Heritage Investment Strategy

11 To maintain the economic recovery through conservation and enhancement of iconic heritage assets which: (i) support and promote heritage tourism, a leading contributor to economic growth; (ii) create a magnet for inward investment; (iii) can provide accommodation for the creative industries; (iv) support the retention and development of conservation, hospitality and management skills To address regional imbalances By enabling historic house businesses to generate employment and incomes in all parts of the UK, in particular in otherwise fragile rural economies, where there may be few alternative sources of economic activity. For example, Castle Howard in North Yorkshire supports 1,000 suppliers, many local. By contrast, when Torosay Castle closed in 2013, the local tourist railway was forced to close. To ensure recovery benefits every citizen at every stage of their lives By ensuring the survival and success of heritage assets that provide recreation and enjoyment for people from all backgrounds and age groups and which provide cultural experiences and an opportunity for all to understand and enjoy our shared history in the UK. To understand our heritage is to understand Britain today; to give it an economic future is to enable it to serve the needs of the future. The proposal would also meet another government objective: To encourage philanthropic giving to support the conservation of nationally important heritage for the public to enjoy By requiring owners to put funds out of reach of their personal use and to dedicate them to the maintenance of nationally important heritage assets open to the public. HMFs transfer funds from private hands into public use and benefit. Need 2. The proposed realignment of legislation is needed for the following reasons: Changes in tax legislation since HMFs were first introduced in 1977 have made them much less attractive as vehicles for supporting the maintenance of heritage property of national importance. In particular the rate of tax on the income generated within HMFs has risen from 30% to the Trust Rate, 45%. As HMFs were created to help private owners to support nationally important heritage this is a serious problem The backlog of urgent repairs in privately owned historic houses in the UK rose to 764m by 2013 (Historic Houses Association Members' Survey), an increase of 96% over the 2009 figure. If repairs cannot be carried out in a timely way the cost escalates, as shown not only in these figures, but also in the extremely high costs for repairs and refurbishment of the Palace of Westminster and the Royal Palaces, as well as in the portfolio of English Heritage and the National Trust There is, for practical purposes for most private owners, no alternative support for maintenance of heritage open to the public. Local Authority and Historic England grants have all but disappeared. The Heritage Lottery Fund does not make repair grants to privately owned heritage. It has introduced the "Our Heritage" programme, which is welcome, but this provides maximum grants of 100,000 for restoration (not repair) linked to a step change in

12 public access or engagement. It is not relevant to repair or maintenance and has limited relevance to nationally important heritage already open to the public. Owners of historic house businesses are competing with other parts of the heritage sector in receipt of capital support (such as the refurbishment grants to English Heritage (EH), the Cathedrals and more recently Churches) and benefiting from more favourable tax treatment. EH, the National Trust and other charities do not pay income tax or Inheritance Tax and also benefit from Gift Aid. Up to 20% of unincorporated historic house businesses in the UK, about 70 historic house businesses, may fail in the next five years, as a result of the pressures building up from maintenance obligations, coupled with the increasing costs of compliance and the uneven playing field for heritage described above; the result would be closure to the public, sales and dispersal of contents, often abroad, loss of cultural value and adverse effects for the surrounding economy Privately owned, nationally important heritage, is a unique selling point for Britain's inbound and domestic tourism. Nowhere else can visitors find such a rich portfolio of lived-in historic houses, with the art, furniture and objects still in situ telling Britain's history in a way that no museum or empty house can. Historic houses, castles and museums are the most often cited reason for people to visit the UK Privately owned historic houses support 26,000 jobs and 52,000 suppliers, many of them local, as well as underpinning related businesses in the area often remote rural areas such as Bed and Breakfast and hotel accommodation, teashops and other tourism attractions Reform is needed to make HMFs a practical option for private owners to secure an economically sustainable future for nationally important heritage and to be able to go on providing very significant public benefits, in terms of access, enjoyment, employment and a boost to economic growth. 3. HMFs were created by a Labour government (1977) and improved by a Conservative government (1982) to enable private owners of nationally important heritage providing public benefits to support the conservation of these heritage assets from their own financial resources. This aim is both desirable and non-contentious in party-political terms. It would make a great deal of sense, in economic and heritage conservation terms, to enable it to be fulfilled once more. The proposals 4. In summary, the proposals would: (i) (ii) (iii) (iv) (v) (vi) exempt income generated within an HMF from income tax, for the reason that such income may be used only for the heritage purposes approved by Parliament as set out in the Inheritance Tax Act; it could not be used for owners' general expenditure make the income received from an HMF by a historic house owner taxable in the same way as other income and grant simplify the tax treatment of HMFs provide for capital gains from the proceeds of disposal of assets in the HMF to be held over where the proceeds are reinvested in assets in the HMF or exempted if used for maintenance of the designated property maintain the income and Capital Gains Tax charges if incomes and gains are not applied for qualifying heritage purposes maintain the current arrangement by which Historic England, or its equivalents elsewhere in the UK, advises on the appropriate level of public access to go with designation of the property as nationally important.

13 5. In detail we propose: 5.1. The amendment of a number of sections in chapter 10 of part 9 ITA 2007: in particular sections 508, 509,510 and section 511. Section 508 should be amended to repeal the current regime and replace it with a direction that the charity rules apply. Sections 510 and 511 should be amended to direct that grants out of HMFs are taxable if the recipient is carrying out a trade or a UK property business. Part 10 ITA 2007 (Special Rules about Charitable Trusts) applies to HMFs (with the exceptions of sections relating to Gift Aid relief). A new section 508 would direct that Part 10 applied with the substitution of heritage maintenance funds in place of charitable trusts and property maintenance purposes in place of charitable purposes throughout. 5.2 The sections that would be excepted from this substitution would the sections for gifts and other payments (sections 520 to 523 and section 538A) and the sections relating to substantial donor transactions (sections 549 to 557). These sections are not appropriate or applicable to HMFs Appendix 1 (attached separately) lists the sections comprised in Part 10 and the relevant proposals The provisions of sections 256 and 256 A to D TCGA 1992 should similarly be modified to exempt sums applied for heritage property maintenance purposes and to charge all gains realised and unrealised at the point at which the HMF ceases to qualify as such. The provisions of section 512 ITA 2007 would be appropriate in determining when a CGT charge would apply The provision of s169d(1) TCGA 1992 which allows a holdover claim in respect of property gifted to the HMF if the trustees have elected or could have elected that section 508 of ITA 2007 has effect, will need to be amended to reflect the repeal of section 508 and to allow holdover relief on gifts to HMFs as defined in section 507 ITA Safeguards 6. These proposals carry key safeguards for Government and for the provision of public rather than private benefit: (i) (ii) (iii) (iv) Income from HMFs may be used only for the maintenance or repair of the designated heritage property to which the HMF is linked, when it is itself approved by HM Treasury The designated heritage property must fulfil public access obligations recommended by Historic England or its counterparts elsewhere in the UK; this would sustain and maximise the public benefits provided by the designated heritage property Income from the HMF is to be taxed in the same way as other income when it is received by the owner of the designated heritage property Although there would be Hold Over Relief from Capital Gains Tax in respect of the proceeds of disposal of assets from the HMF, so long as the proceeds were reinvested in the fund or used for maintenance of the designated heritage property, CGT would be applied to the rolled up gains from disposal of any assets outside the fund or not used for maintenance. Positive impact 7. HMFs reformed in this way would meet a key need for historic house businesses, with public access obligations, to be able to fund essential repairs more effectively.

14 8. For a historic house business, an HMF with a zero rate of tax on income generated within the fund and with the capacity to set the income used for maintenance against that maintenance expenditure, would materially assist in planning and carrying out timely repairs. 9. The improved tax treatment of income, together with the proposed Hold Over Relief from Capital Gains Tax would, the HHA believes, encourage the creation of a further 130 or so HMFs over five years, bringing the total to around 265 HMFs across the UK, covering the majority of historic houses operating commercially and offering public access. 10. The proposals would also, we believe, encourage much greater use of the existing 135 or so HMFs. 11. The Heritage Alliance s member organisation, The Historic Houses Association, estimates that, taken together, the proposals could generate an additional 13m of maintenance work annually. This estimate is based on: (a) the reduction in income tax to 0% on income generated within HMFs and the effect this would have on the creation of new HMFs and the transfer of assets into existing and new HMFs. (b) research carried out in 2013 when the scale of the effect of the cap on SLR on the ability of historic house businesses to fund large scale repair work was being assessed. The note at Appendix 2, below, sets out the methodology behind these estimates. Such an increase in resources available for maintenance work would equate, on average, to an additional 50,000 per HMF, enabling a very worthwhile inroad into the backlog of repairs at this critically important part of the heritage sector. 12. The HHA also estimates that this improved HMF option could make the difference between failure and survival for the historic house businesses particularly adversely affected by the cap on SLR. The future of up to 70 historic house businesses, currently at risk, could be secured. 13. There would be beneficial effects for Britain's heritage tourism. 13 million visitors are welcomed each year to HHA properties in the UK. The 265 or so properties that might benefit from these proposals account for the majority of this visiting, and also have very significant knock on effects on the surrounding economy, in terms of money spent on transport, catering, accommodation and retailing, often in remote rural areas. 14. The additional maintenance work would also generate tax revenue, principally in the income tax generated by additional maintenance work and in additional VAT. 15. There would also be significant cultural and social benefits to UK citizens, as more historic houses would be repaired, refurbished, enhancing the experience for visitors of all ages, and the opportunity to enjoy a shared history. More than half Britain's privately owned historic houses and gardens host community and charitable events and their survival and success will also enable them to continue this role at the heart of their communities. Costs and benefits: immediately and after five years

15 16. The HHA estimates the immediate Exchequer costs of these proposals to be in the order of 3.2m per year, comprising the cost of loss of income tax on current HMF income ( 3.6m) and CGT ( 1.3m) on current disposals, less the additional income tax, VAT, Corporation Tax and NI that would be generated ( 1.7m). 17. The HHA estimates the costs after five years, once the projected increased use of current HMFs and the forecast creation of 130 new HMFs is taken into account to be in the region of 13.2m per year. However, these costs will be abated by the tax revenues, of up to 4.8m, generated by additional maintenance work, bringing the final Exchequer cost after five years, down to about 8.4m per year. 18. By contrast the greater use of existing and new HMFs will spur 13m of maintenance work, equating to an additional 50,000 per HMF, sufficient to enable a significant inroad to be made into the backlog of repairs at 265 historic houses and gardens, open to the public. Such work would support employment and skills in rural areas, and would also equip privately owned historic houses and gardens open to the public to compete, more productively, in the tourism market, for the benefit of the rural economy and consumer choice. 19. The additional resource made available for maintenance would also reduce the pressure to sell contents to meet the cost of major repairs and address maintenance sooner. As has been seen elsewhere, including at the Palace of Westminster, the longer maintenance is delayed, the more expensive it becomes. 20. A note setting out the methodology on which these figures are based is at Appendix 1, below. CASE STUDY Mannerly Court*: Historic Houses Association case study *an actual case but the name has been changed Mannerly Court* is a privately-owned historic house in the North of England, which has been home to members of the same family for the last 500 years. An early 17 th century Jacobean manor house listed at Grade II*, Mannerly is also home to an important collection of paintings and furniture, and historic gardens set within a national park. Mannerly is open to the public for regular group tours and public events, and attracts around 20,000 day visitors per year. The tearooms are open all year round and the estate is considered to be at the heart of the village. The present owners have created a weddings business and offer holiday cottages on the estate, many of which are also listed. They also run a number of commercial lets on the estate, which are home to small and medium sized businesses serving the local community. Despite the present owners creation of an energetic and diverse business model, the future of the house and, consequently, the estate and rural economy it supports is increasingly fragile, due to the restrictive tax framework in which historic house businesses operate. Mannerly faces an urgent need for maintenance expenditure (estimated at 644k plus VAT) to replace its 120-year-old plumbing and heating system, repair the roof of the spectacular library (which was designed by an eminent architect) and re-point its many chimneys. The restrictive tax environment in which historic house businesses operate means the owners of Mannerly are unable to raise the capital required to undertake these urgent maintenance works. The longer these repairs are put off, the more difficult and expensive they become, threatening the continued viability of Mannerly as a business and, consequently, public access to this special house.

16 Two-thirds of the heritage buildings in this country are owned by independent owners mostly private owners and some charitable owners. Mannerly is just one example of many HHA Member houses facing uncertain futures; the 2013 Member Survey revealed a sharply rising backlog of repairs across privately-owned historic houses and gardens, up 96% in four years. The backlog of urgent repairs across HHA Member houses now stands at 764m. The Survey also indicated that 20% of unincorporated historic house businesses - up to 70 historic houses are at risk of business failure in the next five years. The outcome would be closure to the public, sales and dispersal of collections often abroad irretrievable loss of cultural value and adverse spillover effects on employment and incomes in fragile rural economies. Reform of Heritage Maintenance Funds (HMFs) would enable the owners of more historic houses and gardens providing enjoyment for millions to address rising repair bills, refurbish their properties and generate jobs and incomes in the wider economy and in all parts of the UK. Reform would cost relatively little to the Exchequer ( 8m) but could secure the future of up to 265 historic houses and gardens and the public benefits they provide.

17 Appendix 1 HERITAGE MAINTENANCE FUNDS COSTINGS This note explains the method used to estimate the costs and benefits of Heritage Maintenance Fund (HMF) proposals, in terms of the costs to the UK Exchequer, and the benefits, in additional work to maintain and secure the future of many of Britain's most important and fragile heritage assets in the stewardship of private individuals with public access. The costs and benefits are estimated in terms of: Immediate effect Effect after five years, by which time new HMFs will have been created, more assets will have been transferred to existing HMFs and the funds will have had time to generate significant new income. The method has been validated by Saffery Champness. 1. The Heritage Alliance s member organisation The Historic Houses Association estimated the total value of assets in existing HMFs. It assumed there are still 135 HMFs, based on latest information. The average value per HMF is estimated at 2.5m. Therefore the total value of assets currently in HMFs is estimated at 337.5m. Income tax Reduction in income tax charged on income generated in HMFs to 0% 2. HHA estimated the income per year from existing HMFs. It estimated the gross return from assets in HMFs is between 3.5% and 3.75%. These assets are a mixture of property and other assets. Taking account of the significant proportion of capital is invested in property (around 80%) that the net taxable income of a HMF, taking account of management costs and repairs to property, is estimated at 2.5% of the value of the fund per annum. This produces a pre-tax annual income for all current HMFs of 8.4m (rounded). Under the current regime 4.8m total income after tax equates to 35,500 per HMF. 3. Immediate Exchequer cost of a reduction in the rate of tax applied to income generated in HMFs to 0%. Based upon the assumption above, HHA estimated that the income tax that is currently payable (with no change in the law) is in the region of 3.6m. This would be the immediate Exchequer cost if the tax applied to income from HMFs were reduced to 0%. 4. Exchequer cost after five years. HHA considered whether HMFs would be used differently and whether new HMFs might be established if the income tax rate were to be reduced to 0%. 5. The HHA's case study work on Sideways Loss Relief and our 2013 HHA Survey showed the beneficial effect on viability that reform of HMFs would have. In 2010 it estimated that up to 65 new HMFs might be created over a five year period by the reforms proposed then (reduction in the income tax rate to the basic rate, 20%). It then estimated that up to 130 new HMFs might be created following a reduction in the income tax rate to 0% in line with the rules for timed charities, given the survey and case study work above. This would bring the total number of HMFs to 265 in five years' time.

18 6. HHA surveys suggest that owners of existing HMFs would add, by way of further permanent capital, to the assets in those HMFs, under a new 0% income tax regime. In 2010 it was estimated that with a more favourable tax rate on the income of HMFs (20%), owners might increase the size of assets in these funds by about 25%. It estimates that with a 0% income tax rate, owners might increase the amount of assets in related HMFs by 50%, from an average of 2.5m per HMF to 3.75m. If 130 new HMFs were set up over a five year period, averaging 3m each, this would produce a new total of assets in HMFs of about 900m ( 506m in existing HMFs and 390m) in new HMFs), compared with the estimate of 337.5m now. At a rate of return of 2.5% after costs, this would produce an annual gross income of about 22.5m (compared with 8.4m now). Assuming the mix of assets remains the same, HHA estimates that the income tax currently paid by owners and HMFs on this income is about 9.7m. The total theoretical loss to the Treasury from this dynamic effect would therefore be 9.7m. 7. The possible range of costs arising from the income tax element of these proposals is therefore 3.6m to 9.7m. CGT Effect of exempting from CGT disposals of assets within HMFs or for the purposes of providing funds directly for maintenance 8. The proposal to introduce this exemption would, per se, remove the disadvantage that HMFs face of there being no re-basing of assets for CGT purposes within HMFs. It would encourage HMF trustees to sell long term investments (particularly stock exchange investments) to tackle the repair bill rather than waiting as currently for a death in the family. 9. HHA estimated that Trustees sell about 1% of the property investments in HMFs annually and up to 25% of other more liquid stock exchange investments. With these assumptions, it is estimated that the annual taxable capital gains realised from disposals of assets in current HMFs would amount to about 4.75m, generating a Capital Gains Tax liability of about 1.3m, at a CGT rate of 28%. 10. This figure of 1.3m will rise as the reforms produce dynamic results over five years. We forecast that the number of HMFs would to rise to 265 (para 5 and 6 above), and increase the total value of assets in HMFs to 900m. In turn, assuming current assumptions apply, we estimate that the annual value of disposals might rise to about 52m, crystallising a total capital gain of about 12.6m, and a potential Capital Gains Tax liability of 3.5m for all HMFs, if CGT were applied and HMFs grew as described. 11. This produces a range of costs from the CGT element of the proposals from 1.3m to 3.5m. 12. Consequently, the total range of costs is 4.9m to 13.2m. New maintenance work generated 13. The proposals could be expected to raise the amount being spent on maintenance, supported by HMFs. It is estimated that the effect of the income tax exemption would increase the resources generated by HMFs for maintenance of the designated heritage properties (these resources cannot be used for any other purpose), from 4.6m now to 22.5m. The number of historic houses open to the public might also rise. Some of the increase in resources available is attributable to a transfer of income-generating assets into HMFs; the net increase in resource, taking this into account, is equal to the tax saved by HMFs no longer having to pay income tax - 9.7m per year after five years.