Heritage Maintenance Funds (HMFs) were created by the Government in 1976 to enable owners of certain historic houses, designated (possibly with their surrounding land) by the Treasury as of national importance, and open to the public, to set up special trust funds, ring-fenced for the purpose of generating resources only for the maintenance of the designated property.   HMFs are exempt from Inheritance Tax, but income tax and Capital Gains Tax (CGT) continue to apply.

An excellent idea in principle, these HMFs are not, however, generally being used to their potential.  About 135 exist, but the rate of creation of new HMFs is slow, and of those that do exist, many are not being actively used.  The main reasons are: (i) income generated within HMFs is taxed at the trust rate, which is now equal to the top rate of income tax and reaches 50% on 6 April 2010.   Indeed, in some cases, income from HMFs may be taxed again when used in the house for maintenance, resulting in a potential, cumulative tax rate of 75%. 

Secondly (ii), there is no exemption from CGT on disposal of assets in the HMF, even if the proceeds are reinvested in the HMF or used exclusively for maintenance of the designated property.  Assets may have lain in HMFs for a long time, accumulating significant capital gains, and a major CGT liability, even with a CGT rate of 18%.  This deters the use of HMFs to build up funds for maintenance.

As the use of funds in HMFs is strictly ring-fenced for maintenance, and as the HMFs themselves are linked only to nationally important historic houses open to the public, with clear public benefit, HMFs should be seen as lying between the open market and charitable status (charities are exempt from income tax), but currently they are not. 

The HHA has produced proposals to reinvigorate HMFs and their use, recognising their beneficial effects.

The proposals would apply the basic rate of income tax to income generated within HMFs, as it can be used only for maintenance of the designated property and exempt from CGT disposals of assets from the fund, so long as the proceeds were reinvested in the HMF or used for maintenance of the designated property.

The costs to the Exchequer of the proposals would be likely to be less than £10 million per year.

The positive effects would be much greater.  The improvements in the tax treatment of HMFs would encourage their greater use, would lead to more and better planned maintenance work, reduce the backlog of repairs at historic houses - measured at £390m in 2009 by the HHA - reduce the chances of historic properties becoming "buildings at risk" (requiring support from English Heritage or its equivalents elsewhere in the UK) and generate more local employment at historic houses, with a knock on effect on the local economy and increases in income tax returns and VAT to the Government.