Briefings
Art: Attacks on Art or a Tax on Art?
Either way you look at it, it's easy to think the taxman takes more than his fair share from art collectors, whether it is VAT on purchase, capital gains tax on sale or inheritance tax on death. But the reality is that in many circumstances works of art are taxed relatively lightly in the UK and, with careful planning, it may be possible to achieve large tax savings.
This Briefing Note sets out some of the main taxes private collectors may face at the different stages of owning a work of art, with possible tax planning ideas.
1. BUYING ART
1.1 Value Added Tax (VAT)
VAT is a European tax chargeable on all goods and services supplied in the course of a business. So when you buy a work of art within the EU from a gallery or dealer, you must pay VAT at the local rate. Unless you are a non-EU buyer who takes the item outside the EU, this VAT will be irrecoverable. VAT rates vary in Europe - the UK charges 17.5%, which is around the average level. Once you have bought the item, you can move it around the EU freely without paying any further VAT.
If you buy from a dealer or gallery that operates the "second-hand margin" scheme, you will only have to pay VAT on the dealer's profit element. The VAT is incorporated in the total price you pay and is not separately identified. The scheme applies to all original works of art (including contemporary works), antiques over 100 years old and various other collectors' items such as stamp and coin collections.
If you buy from a private individual as opposed to a dealer, you should escape VAT.
If you buy at auction, the VAT position is fiendishly complicated and depends on many factors. You will generally pay VAT on the buyer's premium and sometimes also on the hammer price. The auction catalogue will give further details and the position will vary from lot to lot depending on the status of the seller.
When buying art outside the EU, VAT is chargeable on import. Original works of art, antiques over 100 years old and some other collectors' items qualify for a reduced rate, currently 5% in the UK.
If you are bringing in art for a temporary period only (normally up to two years), you may be able to avoid the 5% VAT. Temporary Importation Relief is subject to certain conditions, including a security payment in case the conditions are subsequently broken or the item is not re-exported. The relief applies to:
- works of art, collectors' items and antiques imported for the purposes of exhibition with a view to sale, or with a view to sale by auction;
- certain items imported by approved museums, galleries and other institutions to be exhibited or used for non-commercial purposes at a public event;
- any item, including works of art, brought in specifically for tests, experiments or demonstrations (reduced to six months if a sale is contingent on the outcome of the tests etc.)
Additionally, if you normally live outside the EU, you can generally bring works of art into the EU free of VAT for an initial period of six months (after which you need to seek an extension from Customs & Excise).
Another method of avoiding VAT on artwork arriving from outside the EU is to complete an import declaration and store the goods in an official bonded warehouse. You can then defer paying any VAT until the items are removed from the warehouse. The obvious downside is that you can't enjoy your art while it sits in a government warehouse in Tilbury!
1.2 Capital Gains Tax (CGT)
CGT is a tax on disposals at a profit. Therefore CGT is not relevant when you buy art. However, your purchase price is used to calculate CGT on an eventual gift or sale of the item. Any buyer's commission, for example if you bought at auction, can be added to the purchase price for future CGT purposes.
1.3 Inheritance Tax (IHT)
IHT is essentially a tax on the value of your estate at death. Therefore buying art has no immediate IHT implications.
1.4 Stamp Duty
Stamp Duty is essentially a charge on documents rather than a tax on transactions. Since most art is bought by someone simply paying the price and taking physical delivery, with no accompanying transfer of a formal title document, no Stamp Duty is payable.
2. SELLING ART
2.1 Capital Gains Tax
If you sell a work of art at a profit then you are potentially liable for CGT at up to 40% on the profit element. However, a wide range of reliefs and exemptions may help you reduce or eliminate the taxable gain:-
- You can deduct the incidental costs of sale such as a gallery's or auctioneer's commission;
- An allowance for inflation may be available, particularly if you have owned the item for many years;
- You can offset any capital losses you may have made on other assets;
- You have an annual CGT allowance of £7,900 (for disposals made in the tax year 6 April 2003 to 5 April 2004);
- Items sold for less than £6,000 are exempt;
- Limited relief may be available where the sale proceeds are between £6,000 and £15,000;
- Taper relief reduces the taxable gain depending on how long (since 1998) the item has been owned. Relief kicks in after 3 years' ownership and maximum relief is given after 10 years' ownership.
If you sell a work of art of exceptional quality (known as "heritage property" - see 3.1 below) to a "national heritage body" by private treaty sale, you can avoid CGT. National heritage bodies include all the great national museums but also most local museums, galleries, libraries, universities and local authorities etc. Your difficulty might be finding an interested museum or gallery that has the money to buy it.
2.2 Inheritance Tax
Generally there will be no IHT implications on the sale of a work of art. The proceeds simply form part of your taxable estate just as the artwork itself did before the sale.
2.3 Value Added Tax
VAT is chargeable on all goods and services supplied in the course of a business. Therefore, a private collector selling a work of art will not have to charge VAT, whereas a dealer or gallery will. If you sell via an agent or at auction, you will have to pay VAT on the agent's fee or the seller's commission.
3. GIVING AWAY ART
3.1 Capital Gains Tax
Normally if you make a gift of a work of art, you are treated as having sold it at its market value. You are then liable for CGT (at up to 40%) on the excess of its current market value over the price you paid. That can hurt since you will have given it away rather than sold it, and therefore you may have no available cash to pay the tax. Fortunately gifts of less valuable items (worth less than £6,000) escape CGT altogether, and marginal relief can still be available where the current value is less than £15,000.
A further relief exists when you give away items of exceptional quality. The relief means no CGT is due on the gift - instead tax is only payable if and when the donee subsequently disposes of the item. Such "heritage property" includes any picture, print, book, manuscript, work of art, scientific collection or other item that "appears to the Board to be of pre-eminent national, scientific, historic or artistic interest". The test is a difficult one to meet but is not restricted merely to very valuable works and nor does it automatically exclude foreign works of art. The Inland Revenue decide whether the test is met, with guidance from Resource: The Council for Museums, Archives and Libraries.
Unfortunately there are strings attached. First, the item has to be kept permanently in the UK. Secondly, the donee has to allow the public reasonable direct access to view the item and must publicise the availability of such access. The old "by appointment only" arrangements no longer apply. The public access requirement can be met by agreeing to lend the item to a public collection. Otherwise, for most exempt chattels, reasonable access will mean agreeing to a minimum of between 5 and 100 public viewing days per year depending on the nature and condition of the item. The donee can charge a reasonable fee to visitors and can prevent photography. If the donee breaks the terms of the public access undertaking agreed with the Inland Revenue, the relief will be withdrawn and CGT will be payable. And remember the Revenue do check up.
Even gifts of lesser quality art will escape CGT if given to charity or to a "national heritage body" (as defined in 2.1 above).
3.2 Inheritance Tax
IHT is essentially a tax on the value of your estate at death. The rate is 40% on all assets above the "nil rate band", which is currently set at £255,000 (for the tax year 6 April 2003 to 5 April 2004). A common reason for giving away a work of art is to reduce the value of your estate so that your eventual IHT liability is lower. However, whilst the gift itself should not attract an IHT charge, if you die within 7 years of the gift, then part (and sometimes all) of the value of the gift is treated as remaining in your estate. The best tax strategy is therefore to make gifts as early as possible, perhaps to your children or even grandchildren. The problem is that this strategy will often be inappropriate for other reasons. In these circumstances a trust arrangement may be suitable (see 5 below).
The other problem with gifts of works of art is that generally they are not effective for tax purposes if you continue to enjoy their use, perhaps by keeping them in your own home. You will have "reserved a benefit" and the item will be treated as remaining in your taxable estate. However, with careful planning you may be able to get round this restriction.
Lifetime gifts to spouses, charities and national heritage bodies (see 2.1 above) are exempt even if you die within 7 years of the gift. The Inland Revenue also allows you to give away items worth £3,000 a year free from Inheritance Tax, and if you don't use the full £3,000 in one tax year, you can carry it forward to the next tax year.
4. OWNING ART ON DEATH
4.1 Capital Gains Tax
No CGT is payable on death. Indeed if you inherit a work of art, you will be treated as having acquired it at its market value at the date of death. That means if and when you sell it, there may be little or no CGT to pay if its value has not risen much since the testator's death.
4.2 Inheritance Tax
Unlike CGT, the IHT position on death is far from benign. Unless your art collection passes to an exempt beneficiary (for example your spouse, a charity or a national heritage body), IHT will be payable at 40% if the total estate exceeds the nil rate band (currently £255,000).
For works of exceptional quality (known as "heritage property") a special conditional tax exemption is available. No IHT is payable provided the recipient agrees to keep the artwork in this country permanently, preserve it and allow reasonable public access (see 3.1 above for further details). Conditional exemption can even continue through multiple generations - we act for a family that, through this exemption, has successfully avoided paying IHT on works of art worth £50m since the 1940s.
If there is an outstanding IHT liability on someone's death and the estate comprises heritage property, it is possible to offer some or all of those works of art in satisfaction of the tax provided the Inland Revenue agree. The "price" will be a matter for negotiation and will be adjusted to allow for the fact that the seller will avoid any CGT that would have been payable on an open market sale. Items accepted in the past have included a portrait of Cesare Allesandro Scaglia by Van Dyck from the estate of Viscount Camrose, which was valued at £13.5m in 1999 and was accepted in lieu of IHT of almost £9.5m. Such arrangements often follow conditional exemption. For example, in the case of Viscount Camrose's Van Dyck, prior to the transfer in lieu of IHT, the painting had been on loan to the National Gallery for three years following the owner's death.
5. USING TRUSTS
Conventional estate planning advice suggests older art lovers should consider giving away their collection to their children or others to reduce the value of their estate for IHT purposes. Aside from the possible adverse CGT implications of a lifetime gift, your biggest worry may be that your children will not look after a work of art or will choose to sell it or, worse still, be forced to sell it on a divorce or because their business is in trouble.
In that case, transferring the artwork to a trust may be the answer. This will often achieve the same tax benefits as an outright gift, whilst placing control of the item in the hands of trustees (who can include you). With careful planning you may even be able to retain some enjoyment of the items given to the trust without falling foul of the "reservation of benefit" rules outlined in 3.2 above.
6. FOREIGN OWNERS
If you live overseas and only occasionally visit the UK, or you live here but are treated as non-UK domiciled, you may be able to benefit from a wide range of tax breaks when you buy, sell or give away valuable works of art or when you die. However, in many cases the rules are complicated and you should seek expert advice.
For example, if you live in the UK but are domiciled elsewhere, your art collection will escape IHT on your death but only if it is physically kept outside the UK. That is often impractical but, if instead the collection is owned by a foreign company and you (or a trust) own the shares in that foreign company then, with careful planning, not only can you achieve the tax advantages but the collection can still remain in the UK.
7. CONCLUSION
The UK tax regime for art collectors can be generous. However, in many cases the rules are very complicated and we would be happy to provide specific tax advice.