8 February 2023

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

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:

Market value of painting
    £100,000
Deduct inheritance tax at 40%
(the deferred charge will be triggered on the sale)
    £40,000
Value of paintings, net inheritance tax
    £60,000
You receive
    £60,000

Contrast this with a qualifying sale to the museum:

Market value of painting
    £100,000
Deduct notional inheritance tax at 40%
    £40,000
Value of paintings, net notional inheritance tax
    £60,000
Add tax incentive (25% of total tax liability)
    £10,000
You receive the “special price” of
    £70,000

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 at Sothebys

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 from Forsters

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].

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