Don’t lose art

Art is lovely. I suspect that all the readers of this esteemed organ have lovely art collections. I’m getting immense pleasure from decorating their fine houses with this luxury item. For sure a world without art would be a poorer and less interesting and colourful place. As indeed would a home without art. 

Galleries often promote art on the basis of its investment value. How else can they hope to achieve the high prices that they charge for a bit of canvas with some paint on it? There is an argument that the most expensive art is that which costs under US$20,000. At this price it almost certainly falls into the same category as 90% of art which has no resale value whatsoever, nor ever will have. 

The generally accepted logic is that until and unless an artist has an auction record there is little or no resale value in their art. Galleries frequently suggest that the only criteria for buying an artwork is whether it gives you pleasure or not, regardless of its the investment value — while quietly suggesting what great investment value the piece has. And, of course, the last completely unregulated investment market is the one for art. Many find the lack of transparency rather irritating. Unlike every other product in the world, it is rare for the seller to put a price on it. Some unkind commentators have suggested this facilitates money laundering. 

How very, very dare they?

Art has now certainly become an asset class and a mainstream investment but, whether you collect for pleasure or return, it is important to understand the tax implications of holding, owning, selling and passing art on to the next generation. 

As art ownership is something of a luxury most collectors tend to also travel extensively, and many will probably own more than one home. This necessarily makes life more complicated. There will be different considerations depending on where the art collector is domiciled and resident, and on where their art is actually hanging. An article that tried to cover every different eventuality in every different country would, of course, end up being a very lengthy book. The writer does not wish to detain you that long, so this piece is written with particular reference to UK law — but many of the issues will be universal.

The UK charges inheritance tax (IHT) on death at 40%, above the nil rate band of £325,000, on all assets located in the UK — irrespective of the domicile or residence of the owner. Art that is hanging on a wall in the UK is treated as a UK-situated asset. Those who are domiciled in the United Kingdom are subject to UK IHT on their worldwide assets, so they would be liable to pay the 40% on the value of their art collection wherever it is located. It could also be the case that the country where it is located also wants to charge IHT or estate duty on the same asset. 

An exception is made if an artwork is owned by a non-domiciled individual and is situated in the UK solely for public display, or cleaning and restoration. This provision is unlikely to apply in most cases. With capital taxes it is by no means certain that a credit would be given for tax paid in one country against tax due in another on the same asset — so it is possible that two charges can occur, virtually or completely wiping out its value to anybody other than the tax man.  Not good.

Many long term residents of the UK may not have formally acquired a UK domicile under general law but they may be ‘deemed domiciled’ and therefore still subject to UK IHT on their worldwide estate. These rules have been recently overhauled. Now, a person who is non-domiciled under general law will be deemed domiciled for IHT purposes from the start of the 15th tax year of UK residence — and deemed domiciled for income tax (IT) and capital gains tax (CGT) from the 16th tax year of UK residence. This means they must pay UK tax on their worldwide income and capital gains. Ouch.  The remittance basis will no longer be available from tax year 16 onwards. This is why so many ‘non doms’, who had been in the UK for 15 years, have now left. 

For those who were born in the UK with a UK domicile of origin and who have subsequently lost their UK domicile, they will now be deemed UK domiciled for IT and CGT purposes from the moment they return to live in the UK and deemed domiciled for IHT purposes from the start of the second tax year.   

One way to eradicate UK IHT is to bequeath the assets to a recognised charity. Art collectors often tend to be of a philanthropic persuasion so it is not uncommon for collections to be left to a public gallery or museum. In theory the IHT exemption would apply to a gift to any such institution because most museums have charitable status. It would also fall within the ‘public display’ provision noted above.

Until recently, UK legislation only applied the exemption to gifts to UK charities. European law has since extended this provision to any charity in the European Union. This exemption was recently deemed by the UK Supreme Court to extend to non-EU third countries (Jersey in this case). However this precedent set by the Supreme Court, while still good law, may change post-Brexit. 

Those collectors who prefer to retain their art collection within the family would be liable to pay IHT in the UK unless it can be planned out. The standard planning is to transfer the art to a discretionary trust, thereby placing it outside the former owner’s estate. The trustees would then be at liberty to dictate what should happen to the art both now and after the death of the previous owner (known as the ‘settlor’ in legal jargon). The problem is how to get the property into trust.

A simple gift would be subject to the lifetime IHT rules in the UK and would therefore attract an immediate charge of 20% of the current value of the artwork or collection. Furthermore, the transfer would be deemed to be a ‘sale’ for capital gains tax (CGT) purposes. If the owner was resident in the UK, CGT would be payable (to oversimplify) on the difference between the acquisition price and current value.

Non-UK domiciled persons can eradicate this potential CGT charge by first transferring the art to an offshore company and then gifting the shares in the offshore company to a trust based outside the UK. Once the transfer to the company has been accomplished, the art would no longer be an UK asset and so no CGT charge would apply. Another way of circumventing the 20% charge would be to have the trust purchase the art. Sales do not attract the 20% IHT charge, but CGT would apply unless the owner was a non-UK resident at the time of the sale. The UK CGT regime has now been extended to non UK residents who transfer UK real estate interests but these measures do not extend to a sale of chattels such as art.

There are a number of hidden traps depending on the status of the settlor of the trust. For instance, it could be that the trust is subject to a ten-yearly charge of up to 6% of the assets held. Various ‘anti-avoidance’ rules can also be brought into play if the settlor continues to ‘enjoy’ the art by hanging it on their wall without making any payment or providing other valuable consideration. The biggest bear trap is the Gift With Reservation of Benefit (GROB) rules. In this case, the gift could be deemed to remain within the donor’s estate for IHT purposes.

The only remaining option is a good taxidermist and an electric rocking chair – which actually doesn’t sound too far fetched in the context of modern British art.

Failing to take considered and timely action in respect of your art collection could be a profound mistake. The large auction houses frequently have estate sales where a major art collection is sold on the death of the owner. You may even have brought art from just such a sale. This may be because the beneficiaries of the estate have more interest in cash than in art — but often it is simply because they need to generate cash to pay the IHT bill. A little planning now can be of huge benefit to your family or other beneficiaries.


Howard Bilton BA (Hons)
Barrister-at-Law (England, Wales & Gibraltar)
Adjunct Professor – Texas A&M University School of Law
Chairman of The Sovereign Group