Sotheby’s and Forsters – An Owner’s Guide to Art – Part 5

• 8 February 2023
• News

Buying and owning art can be one of life’s greatest joys. But while the drive to own art is often fuelled by an emotional connection with a piece or the prospect of holding a lucrative investment, it is important for buyers and owners of art to keep their wits about them, from both a legal and practical perspective.

Felix Hale (Sotheby’s Tax, Heritage and UK Museums Team) and Jo Thompson (Forsters LLP’s Art Group) aim to point those wanting to buy, sell, and hold works of art in the right direction. This five-part mini-series will cover the following key areas:

1. Acquiring and selling art
2. Transporting art
3. Maintaining your collection
4. Passing on your art collection to the next generation
5. Art and philanthropy

This piece is aimed primarily at private individuals with a UK tax exposure.

Part 5 – Art and Philanthropy

There are a wide range of philanthropic schemes in the UK that incentivise owners of art to support museums and galleries. In some cases, the tax benefits associated with the schemes are such that owners can end up in a better financial position than they would have been had they sold their works on the open market. Offers in lieu of inheritance tax and Private Treaty Sales to certain UK institutions offer some of the most significant incentives and enrich owners and the UK national heritage alike!

The Cultural Gifts Scheme

The Cultural Gifts Scheme incentivises owners of ‘pre-eminent” works of art and other objects to donate them to museums and galleries in the UK. To qualify as ‘pre-eminent’ the works must be considered to be of either national, scientific, historic, or artistic importance (works of art and other objects don’t necessarily have to be of high value to meet this threshold).

If you make a donation to a museum under the Cultural Gifts Scheme, you will receive 30% of the agreed value of the object to set against your income tax or capital gains tax liability, which can be spread over a maximum of five UK tax years. Companies can also take advantage of the scheme and can set 20% of the value against their corporation tax liabilities.

Sotheby’s have worked on some wonderful Cultural Gifts, including Damien Hirst’s Bognor Blue, 2008, which was donated by Hirst’s business manager, and friend Frank Dunphy to Pallant House Gallery in Chichester.

Other Charitable Gifts

If your object is not pre-eminent or you prefer to keep things more straightforward, you can make a gift outside of the Cultural Gifts scheme. Gifts of works of art to charities are free of inheritance tax and capital gains tax.

If, after your lifetime, you decide to leave 10% of your net chargeable estate to a charity, the rate of inheritance tax applicable to your estate will be reduced from 40% to 36%. Giving works of art as a gift to museums and galleries in your will or asking your executors to make charitable gifts of artwork in order to meet the 10% threshold could enable your estate to benefit from the reduced rate of tax. To take advantage of this tax treatment, it is essential that the charity is considered a charity for the purposes of UK law. Please contact Forsters if you would like advice on making charitable gifts of artwork either during your lifetime or in your will.

Establishing an Art Charity

If you wish to establish a more regular pattern of donations to art-related causes, then it may make sense to set up an art charity (sometimes referred to as art foundations) of your own. In the UK, a charity must have a charitable purpose that is recognised under English law (for example, the advancement of the arts, culture and heritage) and it must provide a public benefit – any private benefit must be incidental. Forsters has known clients to establish charities that provide museums with financial support for the purchase of art; hold an art collection for the public to enjoy; offer financial assistance to artists by creating artist residencies; or which have an educational objective, such as informing the public about the life and work of an important artist.

A UK charity can be structured either as a trust or company, and usually the structure will be informed by the intended purpose of the charity. A trust structure is often more appropriate when a charity is grant-making and a corporate structure is more suitable for a charity engaged in more complex operational activities and contractual arrangements.

Establishing and maintaining a charity is not a task to be undertaken lightly. It can take time to register a charity with the Charity Commission and rigorous rules and duties need to be complied with on an ongoing basis. That being said, provided that careful thought is given to the operations, governance and funding of the charity, establishing and maintaining a charity can be incredibly rewarding and will enable you to have a greater degree of certainty as to how the charity’s assets are applied. Forsters would be happy to advise on establishing and maintaining a charity with a focus on the arts sector.

Gift Aid

You may wish to consider donating money to UK museums and galleries. The Gift Aid scheme allows taxpayers who give cash to charities to claim higher and additional rate tax relief on the gift. The charity can also reclaim tax on the donation at the basic rate, which means that for every £1 donated, the museum can claim 25p.

Private Treaty Sales to UK Museums and Galleries

If you are considering selling a work of art, and depending on the calibre of that work, there might be a significant financial advantage to selling the work privately to a qualifying UK museum or institution. If the work is ‘pre-eminent’ (or has previously been conditionally exempted from capital taxes (estate duty, inheritance tax or capital gains tax), then the sale to the museum or institution is exempted from capital taxes and the seller is incentivised by a tax incentive (called the ‘douceur’) which is usually 25% of the tax that would otherwise have been payable.

The beneficial tax treatment is best illustrated in an example. Imagine that you had inherited from a parent a piece of artwork that was considered to be pre-eminent. On your parent’s death, an inheritance tax liability of 40% had arisen on the value of the artwork, but the charge had been deferred due to the availability of the conditional exemption (see Part 4 for more information on this). A couple of years have passed since you inherited the artwork (which has not increased in value) and you have now decided that you would like to sell it. Both a qualifying UK museum and a private buyer offer to purchase the artwork at the market value of £100,000.

If you sell to the private buyer:

Contrast this with a qualifying sale to the museum:

So, if the sale of the artwork would either give rise to an inheritance tax, estate duty or capital gains tax charge, then a private treaty sale to a qualifying museum or institution is seriously worth considering. The higher the tax (for example, the rate of the estate duty can be as high as 80%) the greater the value of the ‘douceur’.

The museum also benefits from the tax advantage, as it does not have to pay the full market price for the piece but the ‘special price’ instead. This makes the scheme very attractive to acquiring museums. The National Gallery bought Orazio Gentileschi’s masterpiece, The Finding of Moses, through Sotheby’s using this scheme.

Acceptance in Lieu (AIL)

Broadly speaking, the Acceptance in Lieu scheme allows you to pay some or all of your inheritance tax liability with a ‘pre-eminent’ work. As with private treaty sales (see above), individuals wishing to take advantage of the scheme are incentivised with douceur of 25% of the notional inheritance tax that would have been due. Offers in lieu of tax can be a fantastic way of dealing with large tax liabilities, either following a death or after the sale of conditionally exempt objects.

There is a huge range of items that can be offered in lieu of tax. Sotheby’s have advised on offers ranging from paintings by Van Dyck to a steam locomotive (!) to Gauguin’s last literary manuscript, Avant et Après, the latter of which settled £6.5 million worth of tax and is now on display at the Courtauld Gallery.

If you are considering taking advantage of the Cultural Gifts Scheme or AIL, or entering into a Private Treaty Sale, please get in touch with Sotheby’s and Forsters.

We hope you have enjoyed this mini-series and found it helpful. For all art-related queries, please contact Sotheby’s or Forsters.

Felix Hale is a Deputy Director in Sotheby’s Tax, Heritage & UK Museums department. He works with some of the most significant estates and collections in the UK, working with clients on valuations, sales, offers in lieu of tax, and claims for Conditional Exemption. He is a member of PAIAM (Professional Advisors to the International Art Market, Vice-Chair of the next generation board) and a member of STEP (Society of Trust and Estate Practitioners).

If you would like to contact Felix, you can email him on [email protected].

Jo Thompson is an associate in Forsters’ Private Client team and part of Forsters’ Art and Cultural Property Group. She acts for UK and international clients, advising high net worth individuals, families, landed estates, family offices, trustees and beneficiaries on a range of estate, trust and tax planning matters. Her work includes succession planning for a number of living artists and advising on heritage property matters. She also acts for high net worth individuals and trustees holding significant art collections.

If you would like to contact Jo, you can email her on [email protected].

Sotheby’s and Forsters – An Owner’s Guide to Art – Part 4

• 18 January 2023
• News

Buying and owning art can be one of life’s greatest joys. But while the drive to own art is often fuelled by an emotional connection with a piece or the prospect of holding a lucrative investment, it is important for buyers and owners of art to keep their wits about them, from both a legal and practical perspective.

Felix Hale (Sotheby’s Tax, Heritage and UK Museums Team) and Jo Thompson (Forsters LLP’s Art Group) aim to point those wanting to buy, sell, and hold works of art in the right direction. This five-part mini-series will cover the following key areas:

1. Acquiring and selling art
2. Transporting art
3. Maintaining your collection
4. Passing on your art collection to the next generation
5. Art and philanthropy

This piece is aimed primarily at private individuals with a UK tax exposure.

Part 4 -Passing on your art to the next generation

It is important that art is not seen as a “static” asset, even if a work or collection is a long-term hold. You should ensure that you have discussions with your family about the future of your collection. It is important to know whether your family wishes to keep specific artworks or a collection within the family or not. If your intention is to pass artwork to the next generation, make sure you do so in the most tax efficient way possible. Alternatively, if future generations do not want to keep and maintain the artwork or collection, you might decide to sell all or part of it to raise funds for other purposes. Agreeing a strategy in respect of an artwork or collection can help to reduce the chances of a destructive post-death dispute arising.

No family situation or collection is ever quite the same, so it is certainly worth discussing your position with your advisors and putting appropriate long-term planning in place.

Gifts to the next generation

UK capital gains tax (CGT)

If you are a UK resident and do not claim or are not eligible for the remittance basis of taxation, there may be CGT to pay if your artwork has increased in value between the date on which you acquired the work and the date on which you give it away. Currently, CGT is charged at 10% at the basic rate and 20% at the higher rate.

Certain exemptions from CGT would be available on a gift to your children. For example, so-called ‘wasting assets’, which include clocks and watches, are exempt from CGT, as are any individual objects valued at £6,000 or less. In addition, each individual has an annual CGT-free allowance, which is currently £12,300 per year. This will be reduced to £6,000 for disposals made between 6 April 2023 and 5 April 2024 and to £3,000 for disposals made between 6 April 2024 and 5 April 2025.

Any capital gains tax charge arising on the gift would be a “dry” charge, as the transaction would not provide you with any funds from which to pay the tax due, so it is important that you reserve sufficient funds for the purpose of footing the capital gains charge that will be due and reportable in your self-assessment UK tax return in the tax year after you transferred the asset.

If you claim the remittance basis of taxation then it may be possible to gift free of tax if you make the gift outside the UK, if the intention is for the artwork to remain offshore. We recommend that if you claim the remittance basis of taxation and wish to transfer artwork, you should seek advice on the options available to you.

A UK resident with tax exposure in other jurisdictions should be mindful of CGT liabilities that may arise in these jurisdictions as a result of the gift and whether any tax treaties between the UK and the jurisdiction in question would protect against the risk of double taxation.

UK inheritance tax (IHT)

You will have an IHT exposure if you are UK domiciled (broadly, you intend to remain in the UK permanently) or “deemed domiciled” in the UK for tax purposes (because you have been UK tax resident for 15 of the last 20 UK tax years). If you are not UK domiciled or deemed domiciled, then you will only be exposed to IHT to the extent that you hold assets that are situated in the UK. For more detail on this, please see Part 1 of this series or contact Forsters for more tailored advice.

If you own an artwork or collection which has a significant IHT exposure, you may wish to contemplate making a lifetime gift of the work to the next generation to help mitigate the IHT exposure of your personal estate.

Outright gifts

Outright gifts to individuals do not attract IHT immediately. A gift of a piece of art to a child, for example, would be a “potentially exempt transfer”, meaning that the gift would be free of IHT, provided that the gift is absolute (in other words, you do not reserve a benefit in the artwork once the gift is made) and you survive seven years from the date on which the gift is made. If you died within this seven-year period, this would trigger a charge to inheritance tax at up to 40% of the value of the painting, subject to the availability of your inheritance tax-free allowance (“nil rate band”) of £325,000. If you survived beyond three years, the rate of IHT on the gift reduces, tapering to 0% if you survived the gift by the full seven years.

You can also make gifts of £3,000 in each tax year, which will be exempt from IHT, even if you die within seven years. You can carry forward one year’s exemption, so if you did not make any gifts last tax year, then in this one, you could give away £6,000 without any IHT consequences.

If you decide to make a gift, we recommend that the gift (including the date on which it is made) is formally recorded by deed. It avoids any argument about whether the recipient has taken physical ownership and the gift is therefore effective and it will be helpful for the executors of your estate to have this sort of documentation when it comes to administering your estate and working out the IHT due.

Gifts to trusts

A lifetime gift to a trust will, in many situations, attract an immediate charge of 20% to the extent that it exceeds the nil rate band. If you were to make a gift to a trust and then die within seven years, an IHT charge of an additional 20% could arise.

If you decide to make any lifetime gifts, you may wish to consider obtaining insurance to cover the risk of the potential IHT exposure while the seven-year clock is ticking. This might be particularly important when it comes to making outright gifts to individuals, who will be primarily liable for meeting the IHT charge.

Rental agreements

To ensure that the seven-year clock starts ticking for IHT purposes, it is essential that the gift is absolute. However (and as is often the case), you may wish to keep enjoying those works of art on the walls (or your collection of furniture, books, ceramics, or anything else!). If so, you can consider entering into a gift and leaseback arrangement whereby you would make a gift of artwork to the next generation and then lease the artwork back from the recipient of the gift at a commercial rate.

Rental arrangements can be an effective way of mitigating IHT and enabling you to continue to enjoy the item or work in question, but before one is entered into, it is important to consider the costs involved in valuing the objects and negotiating the rents. The rental arrangements also need to be in place consistently for seven years before the donor’s death and continue to reflect a market rent at any point in time during that period in order to eliminate completely any exposure to IHT. Clearly, then, the amount of rent that would need to be paid under a rental agreement should be compared against the IHT exposure.

Where artwork is held in trust and enjoyed by a beneficiary of the trust, then in certain circumstances, rental agreements can help to ensure that adverse tax implications do not arise as a result of the benefit conferred on the beneficiary. For further guidance on this, please get in touch with Forsters, who can liaise with Sotheby’s regarding valuations and negotiation of a rental figure (either on behalf of the owner or the borrower).

Artwork passing on death

Succession

The most effective way to ensure that your artwork ends up in the right place after your death is to put a will in place that governs the succession of your artwork (and, ideally, the rest of your personal estate).

Those with assets in different jurisdictions should ensure that any wills address the succession of those assets according to the relevant local laws. Forsters would be happy to advise on this.

Tax considerations

As mentioned above, if you are UK domiciled IHT will be charged on your worldwide assets at 40% on your death, subject to the availability of your inheritance tax free allowance of £325,000 and applicable exemptions, such as the spouse exemption. If you are not UK domiciled, but die owning assets in the UK, these assets will be subject to IHT in the same way.

Conditional Exemption

In order to mitigate your inheritance tax liability, you may wish to take advantage of a tax incentive that exists in the UK for owners of important works of art. It is designed to indefinitely defer tax arising on ‘pre-eminent’ works in return for allowing a degree of public access to them.

It is hard to overstate the importance of this scheme, which has been going strong since 1896 and is one of the main reasons why the UK has so many amazing objects and collections still in private hands but on public display. The scheme allows owners of ‘pre-eminent’ works of art and other objects (including land and buildings) to pass them down to the next generation and retain them in private ownership by conditionally exempting them from inheritance tax. In exchange, the owner agrees to grant public access to the object. Public access can be given to an object either by putting it on display in a house that is open to the public or placing it on loan at a UK museum. HMRC usually expect the object to be on public display for at least 28 days per year (25 days in Scotland) unless for example you are exempting archives or other manuscript material where public access can be given ‘by appointment’ only.

To qualify as ‘pre-eminent’ the object must be considered of either national, scientific, historic, or artistic importance. Works of art and other objects don’t necessarily have to be of high value to meet this threshold. Exemption can also be claimed on groups of items or sometimes an entire collection. In certain cases, it is possible to exempt a collection that might not necessarily meet the pre-eminence threshold on the basis of their association with a particular historic building.

If the owner no longer wants to put the object on public display or would like to sell the work, then the tax that would have been due becomes payable. If owners are contemplating selling an exempt object they should consider a ‘Private Treaty Sale’ to a qualifying UK museum as there can be significant tax advantages in doing so, as outlined in Part 5 (coming soon).

How we can help…

For further guidance on your UK residence or domicile status, or on the tax implications of making a gift or leaving a legacy in your will to the next generation, please get in touch with Forsters.

Sotheby’s is delighted to discuss passing on your art collection to the next generation. Sotheby’s frequently assist owners with claims for Conditional Exemptions ranging from a single painting to large country house collections, advising on the likelihood of the work meeting the threshold required for exemption and providing supporting evidence for this. Forsters can advise on the associated tax reporting.

In the next and final part of the mini-series, we will be looking at philanthropic initiatives relating to art, as well as the tax benefits that incentivise owners to take advantage of these.

Felix Hale is a Deputy Director in Sotheby’s Tax, Heritage & UK Museums department. He works with some of the most significant estates and collections in the UK, working with clients on valuations, sales, offers in lieu of tax, and claims for Conditional Exemption. He is a member of PAIAM (Professional Advisors to the International Art Market, Vice-Chair of the next generation board) and a member of STEP (Society of Trust and Estate Practitioners).

If you would like to contact Felix, you can email him on [email protected].

Jo Thompson is an associate in Forsters’ Private Client team and part of Forsters’ Art and Cultural Property Group. She acts for UK and international clients, advising high net worth individuals, families, landed estates, family offices, trustees and beneficiaries on a range of estate, trust and tax planning matters. Her work includes succession planning for a number of living artists and advising on heritage property matters. She also acts for high net worth individuals and trustees holding significant art collections.

If you would like to contact Jo, you can email her on [email protected].

Sotheby’s and Forsters – An Owner’s Guide to Art – Part 3

• 11 January 2023
• News

Buying and owning art can be one of life’s greatest joys. But while the drive to own art is often fuelled by an emotional connection with a piece or the prospect of holding a lucrative investment, it is important for buyers and owners of art to keep their wits about them, from both a legal and practical perspective.

Felix Hale (Sotheby’s Tax, Heritage and UK Museums Team) and Jo Thompson (Forsters LLP’s Art Group) aim to point those wanting to buy, sell, and hold works of art in the right direction. This five-part mini-series will cover the following key areas:

1. Acquiring and selling art
2. Transporting art
3. Maintaining your collection
4. Passing on your art collection to the next generation
5. Art and philanthropy

Part 3 – Maintaining Your Collection

This part of the mini-series is designed to equip you with practical tips on how to maintain, insure, and keep track of the works of art in your collection.

Insurance

Insurance values should be reviewed regularly to avoid either underinsuring your collection or paying premiums that are too high. Generally, we recommend updating insurance values every 5 years or so. Depending on the nature of your collection, you may want to consider a specialist art insurer.

If you would like to discuss a valuation, please get in touch with Sotheby’s.

Inventories

If you have a large collection, you might want to consider managing it using collection management software such as ‘Collector Systems’. This is a useful way to monitor your collection as it enables you to store information regarding the purchase (invoices etc.), insurance and valuations, as well as up-to-date records on the condition and maintenance of works. Reviewing the collection every few years is important to keep track of works that are damaged, lost, or stolen, especially if any of the works are conditionally exempt from inheritance tax (where their loss would trigger a substantial charge).

Environment

Although it is often impossible to try to replicate museum-like environments in your home, there are some simple things to consider to keep your collection in good condition.

Ideally, you should try to maintain a stable temperature and humidity in the rooms housing your collection. Some items, such as watercolours, are particularly sensitive to light, so you should try to reduce the amount of direct sunlight these works get and consider either rotating your displays and/or protecting works with UV resistant glass.

As part of a collections review or valuation, Sotheby’s would be delighted to discuss any concerns you might have about how your collection is being maintained and displayed. General guidance can also be obtained from the English Heritage website.

If a work of art is particularly difficult to display in your home, you may want to think about keeping it in specialised fine art storage or lending the work to a museum.

Loans

You may wish to consider lending pieces from your collection to a museum, either for an exhibition or on a long-term basis. A loan to an important museum has the potential to increase a work’s value: its display is testament to its art-historical significance and can bring the work to wider international attention. Sotheby’s is able to draw on its global network of museum contacts to help you find the most suitable museum in which to display your work of art.

Regardless of the duration of the loan, it should always be underpinned by a loan agreement. In particular, this agreement should set out which party is responsible for insurance, the costs of transport, and any other conditions for display. Usually, under the terms of a loan agreement the museum will be responsible for insuring the work, whether that is with a commercial insurer, or more commonly, with the government backed Government Indemnity Scheme (GIS), which provides owners with ‘nail to nail cover’, including when the work is being transported to and from the museum. Forsters can assist you with negotiating the terms of a loan agreement.

Holding vehicle

If an individual is UK resident but non-UK domiciled, and holding art in the UK, it may be worth considering holding the art via an offshore structure, such as a company, so as to shield the artwork from UK inheritance tax. This is particularly the case if the intention is for the artwork to be a long-term hold. There may, in addition, be succession considerations, for example, staying outside of certain succession and tax regimes, that point toward ownership through a trust. Matters regarding succession will be considered in further detail in Part 4.

If the intention is to hold art in an offshore structure (be it a company and/or a trust), then the tax implications of the transfer to the structure need to be considered (for this reason, and as outlined in Part 1, it is preferable to think about the asset’s use and future before going ahead with the original purchase, so that the structure is right from the outset). There are also other considerations that come into play here, which relate to the ongoing management and use of the offshore structure. If you would like advice on the most effective way to hold your artwork, both from a tax and succession perspective, please contact Forsters.

In the next part of the mini-series, we will be looking at the implications of passing on your art to the next generation.

Felix Hale is a Deputy Director in Sotheby’s Tax, Heritage & UK Museums department. He works with some of the most significant estates and collections in the UK, working with clients on valuations, sales, offers in lieu of tax, and claims for Conditional Exemption. He is a member of PAIAM (Professional Advisors to the International Art Market, Vice-Chair of the next generation board) and a member of STEP (Society of Trust and Estate Practitioners).

If you would like to contact Felix, you can email him on [email protected].

Jo Thompson is an associate in Forsters’ Private Client team and part of Forsters’ Art and Cultural Property Group. She acts for UK and international clients, advising high net worth individuals, families, landed estates, family offices, trustees and beneficiaries on a range of estate, trust and tax planning matters. Her work includes succession planning for a number of living artists and advising on heritage property matters. She also acts for high net worth individuals and trustees holding significant art collections.

If you would like to contact Jo, you can email her on [email protected].

Sotheby’s and Forsters – An Owner’s Guide to Art – Part 2

• 7 December 2022
• News

Buying and owning art can be one of life’s greatest joys. But while the drive to own art is often fuelled by an emotional connection with a piece or the prospect of holding a lucrative investment, it is important for buyers and owners of art to keep their wits about them, from both a legal and practical perspective.

Felix Hale (Sotheby’s Tax, Heritage and UK Museums Team) and Jo Thompson (Forsters LLP’s Art Group) aim to point those wanting to buy, sell, and hold works of art in the right direction. This five-part mini-series will cover the following key areas:

1. Acquiring and selling art
2. Transporting art
3. Maintaining your collection
4. Passing on your art collection to the next generation
5. Art and philanthropy

Part 2 – Transporting art

If you wish to transfer artwork from the UK to another jurisdiction, you will need to comply with any applicable export reporting obligations and tax payments under UK rules and any import payment or reporting obligations in the jurisdiction of entry. Similarly, if you wish to bring artwork into the UK, you will likely have an exposure to UK VAT. This article outlines the applicable restrictions and rules in the UK and aims to provide practical tips for the transportation process.

Export considerations

Licences

Since the Second World War, the UK has exercised various export controls for works of art and other historical objects.

Broadly, where a work has been in the UK for less than 50 years one applies for an Open General Export Licence (Objects of Cultural Interest) which permits permanent export to any destination (save for embargoed ones) of works that do not exceed the age and value thresholds outlined below. Works of art that have been in the UK for more than 50 years and that meet a monetary value threshold (which can be fairly modest) require an individual export licence in order to be exported from the UK.

The process of applying for an export licence is as follows. You make an application (which contains details of the full provenance and ownership history of the artwork) to Arts Council England, who refer the work to an Expert Advisor. If the Expert Advisor objects to the export of the artwork, then the case is considered by the Reviewing Committee on the Export of Works of Art (RCEWA), who determine whether the work is a ‘national treasure’ on the basis that its departure from the UK will be a misfortune on one or more of the following three grounds (called the ‘Waverley Criteria’):

1. The work is closely connected to UK history and national life;
2. The work is of outstanding aesthetic importance; or
3. The work is of outstanding significance for the study of some particular branch of art, learning or history.

If the committee finds that the object meets one of the above criteria, a deferral period (called the ‘first deferral period’) is imposed to allow a UK purchaser (almost always a UK museum or gallery) a chance to express a serious intention to match the sale price (or an agreed value if no sale has taken place) and acquire the work of art. If a UK purchaser expresses a serious interest to acquire the work during this first deferral period, another deferral period (the ‘second deferral period) is imposed, giving the acquiring institution a chance to raise the funds necessary to purchase the work.

The export reviewing process can take up to a year to complete. Cases are heard by the reviewing committee normally within two or three months following the receipt of the objection to the export. The first deferral period typically runs for a period of between two and four months. The second deferral period typically lasts a maximum of six months, although if an object is exceptionally valuable the committee has discretion to impose an even longer deferral period to allow a UK purchaser to fundraise.

If no UK purchaser shows a serious intention to purchase a work by the end of the first deferral period however, the export licence is granted at that point. Similarly, if the potential UK purchaser fails to raise the necessary funds by the end of the second deferral period, the export licence is granted.

Often the export licencing process occurs when a work of art is sold in the UK and acquired by a foreign buyer who then wants to export their object. If the seller remains the owner (because the buyer hasn’t yet paid) the ‘matching offer price’ is the amount the seller would have received had the work been sold to the foreign buyer. If the buyer is the owner (because they have paid for the item) the matching offer amount is the amount they paid for it. If you are a buyer who intends on exporting a work that has been in the UK for over 50 years, you may wish to defer payment until an export licence has been granted. This is something that would need to be agreed with Sotheby’s prior to the sale.

The system in place tries to strike a balance between enabling a thriving art market, where buyers are able to purchase with confidence, and protecting the UK national heritage. Only a small number of items each year are referred to the Review Committee, and in even fewer cases are funds-raised successfully. Sotheby’s frequently represents clients whose objects have been referred to the Committee.

Currency fluctuations

Although the UK export licence applications are made in GBP, a foreign buyer may well have paid for the artwork in another currency. The export licence process can be lengthy, and currency fluctuations during that time can be a real concern to buyers. Since 2021, buyers who have paid in non-Sterling currencies can choose for the ‘matching offer price’ to be paid with the currency conversion as at one of the following three dates:

1. The date of the original sale;
2. The date of the export licence application; or
3. The date of the Reviewing Committee hearing.

Import considerations

If you wish to bring art into the UK, the import will generally be subject to a VAT charge of 5%. In order to benefit from this lower rate of VAT, the art will need to meet certain conditions and have the correct commodity code. There is generally no customs duty charged on imports of mainstream categories of art, for example, original oil paintings or pencil drawings.

Make sure that you have complied with any exporting obligations in the jurisdiction from which the artwork is being imported!

Practical considerations

We strongly recommend that your work is properly insured from the moment it is taken off the wall and placed onto a new one. In particular, we would recommend using a specialist fine art shipper for fragile pieces.

Sotheby’s can advise on shipping and arrange expert delivery of your works of art worldwide when either importing goods before a sale or arranging shipping and exporting on completion of a sale. Sotheby’s would be happy to speak to you about moving your art safely.

For any guidance on the import or export of artwork, please contact Forsters or Sotheby’s. In the next part of this mini-series, we will be looking at practical tips on how to maintain, insure and keep track of your artwork.

Please note that this briefing offers general guidance on the transportation of artwork. The circumstances of each case vary, and this note should not be relied upon in place of specific legal advice.

Felix Hale is a Deputy Director in Sotheby’s Tax, Heritage & UK Museums department. He works with some of the most significant estates and collections in the UK, working with clients on valuations, sales, offers in lieu of tax, and claims for Conditional Exemption. He is a member of PAIAM (Professional Advisors to the International Art Market, Vice-Chair of the next generation board) and a member of STEP (Society of Trust and Estate Practitioners).

If you would like to contact Felix, you can email him on [email protected].

Jo Thompson is an associate in Forsters’ Private Client team and part of Forsters’ Art and Cultural Property Group. She acts for UK and international clients, advising high net worth individuals, families, landed estates, family offices, trustees and beneficiaries on a range of estate, trust and tax planning matters. Her work includes succession planning for a number of living artists and advising on heritage property matters. She also acts for high net worth individuals and trustees holding significant art collections.

If you would like to contact Jo, you can email her on [email protected].

Sotheby’s and Forsters – An Owner’s Guide to Art – Part 1

• 30 November 2022
• News

Buying and owning art can be one of life’s greatest joys. But while the drive to own art is often fuelled by an emotional connection with a piece or the prospect of holding a lucrative investment, it is important for buyers and owners of art to keep their wits about them, from both a legal and practical perspective.

Felix Hale (Sotheby’s Tax, Heritage and UK Museums Team) and Jo Thompson (Forsters LLP) aim to point those wanting to buy, sell, and hold works of art in the right direction. This five-part mini-series will cover the following key areas:

1. Acquiring and selling art;
2. Transporting art;
3. Maintaining your collection;
4. Passing on your art collection to the next generation; and
5. Art and philanthropy.

This piece is aimed primarily at private individuals with a UK tax exposure.

1 – Acquiring and Selling Art

Acquiring and selling art can often be an intimidating prospect, particularly for a first-time buyer or seller. Even well-versed art collectors can find the process hard to navigate.

In Part 1, we highlight key points that you may wish to consider when it comes to acquiring and selling art for personal use, either privately or by auction.

A. Acquiring Art

Before taking the plunge and deciding to bid on a work of art at auction it is important to do your homework; you might wish to research the artist and the provenance and look back at some past sales. Try to see the artwork in person, even if the sale is online. Look carefully at the Auction catalogue (which nowadays is usually found online) and check if the lot is marked with any symbols as these may provide important information relating to, for example, VAT, Artist’s Resale Rights, and any export restrictions. Do get in touch with Sotheby’s if you have any questions or would like to see a condition report for the piece.

Buyers should be aware that auction houses will charge a ‘Buyer’s Premium’ to purchasers at auction, which is an amount over and above the ‘hammer price’ the auctioneer sells the work for. The rate of Buyer’s Premium will be listed on the auction house’s website or in the auction catalogue.

If you are buying a work of art through a private sale, make sure you read the sale contract carefully in order to understand all of the costs, logistics and other terms associated with the sale. For further help with this, please get in touch with Forsters.

Once you have made a purchase, we recommend that you safely store all the paperwork associated with that purchase. It will come in handy if you decide to sell or make a gift of the work in the future and your accountants will thank you for the additional information when it comes to calculating any tax liabilities arising as a result of the purchase or future transfer of the work.

Funding the purchase – tax considerations

VAT

Generally speaking, and with some exceptions, the purchase of a work of art in the UK for personal use is subject to VAT at the standard rate of 20%, even if the artwork is exported from the UK shortly after. VAT should not be applicable if the seller is not subject to VAT.

Works of art are often sold through what is known as the ‘margin scheme’, where VAT on second-hand goods is charged on the Buyer’s Premium element only. This means that the VAT arising on the purchase is assessed on the difference between the price the work was last sold for and the current sale price, as opposed to the entire sale price.

VAT, which is collected by the auction house or other seller alongside payment for the work, is the responsibility of the buyer, so it is best to check what the VAT liability will be and take this into consideration when gathering the funds for your art purchase. If you are buying the artwork for personal and private use, you are unlikely to be able to recover the VAT.

Considerations for non-UK domiciled purchasers who are resident in the UK

Private individuals will have a UK tax exposure if they are (1) UK domiciled and/or UK resident or (2) not UK domiciled or not UK resident, but hold UK situs assets. Broadly, an individual will be domiciled in the UK if they intend to remain in the UK permanently or they have left the UK but not formed the intention to permanently reside in another jurisdiction. They will be “deemed domiciled” for UK tax purposes if they have been a UK tax resident for 15 of the last 20 UK tax years. The number of days an individual spends in the UK and the extent of the ties they have with the UK will determine whether they are UK tax resident. For further guidance on your UK residence or domicile status, please contact Forsters.

If you are UK resident but non-UK domiciled, be wary of using untaxed foreign income and gains to acquire a piece of art which is in the UK. Doing so will constitute a taxable remittance of those funds, even if the funds are not transferred to a UK bank account. This could result in a UK tax liability of up to 45% on the purchase price!

Ideally, a buyer in this position should purchase the art using ‘clean capital’ – essentially any funds which will not be taxed in the UK, even if remitted. However, if it is necessary to use foreign income or gains to fund the acquisition, then completion of the purchase (i.e. payment and delivery to the purchaser) should not occur until the piece of art has been removed from the UK, with the seller retaining title to the artwork until that time. The sale and purchase agreement should be tailored accordingly to set out these conditions for sale. Forsters would be happy to advise on this.

Choosing the right purchaser

As with the acquisition of any asset, it is helpful to think about the artwork’s use and future before buying it, as this will help to determine the most suitable purchaser, whether it be an individual, company or other entity. Although the ownership structure can be changed, it is preferable to get the structure right from the outset.