The art world is known for its privacy and discretion. Artworks are purchased by undisclosed buyers for undisclosed sums and often little is known of their whereabouts. However, recent changes to the tax treatment of trusts, combined with new global transparency legislation, may result in new levels of openness.
The first change relates to the global transparency rules in place following the introduction of exchange of information measures such as FATCA and the CRS. Trustees may be obliged to report details of persons with a beneficial or controlling interest, trust assets and their values and, where benefits are paid out, the value of those distributions in the year to the relevant tax authorities.
The second change comes from recent legislative changes published in the UK Finance (No. 2) Act 2017 and the Finance Act 2018 and their impact on the tax treatment of non-doms. Trustees holding art may be unaware that from 6 April 2017, a simple formula based broadly on the acquisition cost and number of days of enjoyment will dictate the value attributed to beneficiaries who enjoy trust-owned art. Beneficiaries who have been resident in the UK for 15 of the past 20 tax years will now be deemed domiciled. There is therefore a risk that where a trustee holds art which is housed in a property outside the UK that is used by a deemed domiciled beneficiary, the beneficiary will be taxable on the benefit of enjoying the artwork.
For example, Giuseppe is the primary beneficiary of the Grand Master Trust. He was born in Italy but moved to London in 2001 and, from 6 April 2017, is treated as UK deemed domiciled for all tax purposes. The trustee of the Grand Master Trust, XYZ Limited, is a trustee service provider based in Jersey. The Grand Master Trust holds an art collection, comprising a significant number of Canalettos, a prized Vermeer and some abstract sculptures in the grounds, via a Jersey company. It is Giuseppe's habit of spending the winter months in his villa in Monaco where the Grand Master Trust art collection is kept and which Giuseppe enjoys by way of licence. The trustees maintain insurance and upkeep of the artworks. The trustees also hold significant financial assets via another Jersey company. The new rules mentioned above will affect the trustees as follows:
- Under the CRS, XYZ Limited will be treated as a financial institution and will have a duty to report Giuseppe as a beneficiary of the Grand Master Trust and the value of his benefits in the tax year. XYZ Limited will also have to report the total value of the trust fund.
- Under the new deemed domicile and valuation rules, Giuseppe will need to include the value of the benefit he receives from the trust in his self-assessment return. This will include his free enjoyment of the artworks when he stays there. The formulae in the Finance Bill will assist him in computing the value of these benefits but it will be necessary for XYZ Limited to provide Giuseppe with the following:
- The price paid for the acquisition of the artworks converted into sterling using the exchange rate prevailing at the time (following HMRC's published exchange rate);
- The market value of the artworks at the time of the acquisition (again, converted to sterling); and
- The amount (in sterling) of any expenditure wholly and exclusively incurred by or on behalf of the trustees for the purposes of enhancing the value of the artworks.
- If XYZ Limited does not provide this information to Giuseppe and he fails to complete the necessary information in his self-assessment return, there is the chance that HMRC could "join the dots" between the information they receive from XYZ Limited as trustees of the Grand Master trust under the CRS and start an enquiry into Giuseppe's tax affairs.
Trustees holding artworks will need to consider the new rules carefully and provide their beneficiaries with the relevant information in due time. If you are a trustee, settlor or beneficiary and you have any questions about these issues, or you would like us to analyse your particular circumstances and advise on the relevant reporting obligations and possible tailored mitigation strategies, please contact Andrew Goldstone or your usual Mishcon de Reya tax contact.