At JTC we have significant experience in administering structures with art collections. Many of our clients have an interest in art, which can be a complex asset to administer. We asked Nic Arnold, Private Client Director at PWC in London, about some of the main tax rules that clients should consider if they own art or are considering building a collection:
When thinking about IHT charges on art, should clients be advised to hold their collection in a trust?
There is no one specific reason why a client should own an asset in a trust, and tax is usually not the deciding factor. In fact, trust taxation is particularly complex and there is more than just IHT to think about. Trusts are however very useful tools for the long-term ownership of assets that need asset protection and good governance that can be sure to remain in place irrespective of what else is going on in the lives of those who benefit from the trust assets. Art is therefore a common asset class to be held in trust.
IHT must however be looked at carefully, taking into account the tax profile of the trust, the settlor and the beneficiaries. Change one fact and the appropriate tax answer for one situation may be completely different to another. For IHT, while one might focus on preventing a 40% charge on death, one also needs to understand if IHT is chargeable on settling art into a trust, while it remains held on trust and even if the art is removed from the trust. Understanding how the art is used and who benefits from it is also key for IHT charges. Overall however, trusts can play an important role when owning art.
What are the tax considerations for international families building art collections?
The thing here is that art ownership often spans different tax jurisdictions and even customs unions, which has become particularly relevant post Brexit. I worked with a family recently to review the tax status of their entire art collection, which was kept in seven different countries. To understand the tax exposure for any given piece, one had to consider which pieces were in which countries; how they were being used and what tax profile this gave rise to.
If a piece of art was taken from a family home and lent to a gallery, or put to some kind of business use, did this have better or worse tax outcome than if this was done in a different country? If art was going to be sold, gifted or if the owner was to die, what would the tax impact be in the art’s location? Would it be wise to move the art to a jurisdiction that has a more favourable outcome? But if the art was to be moved, we had to consider if there was VAT or customs implications. It was a complicated project, but it ultimately gave the family a really good understanding of the tax profile of their art, and thus the possible value erosion of the collection due to tax.
There is more to consider than just tax of course. This project helped the client to really think about how well they knew, at any given time, where each piece of art or antique was and who was looking after it. Was the right insurance covering the right item, in the right place, at the right time, for example? If a piece was lent out or moved, what were the terms and how was it tracked that it would be returned? There is of course software to help with this type of collection management, but good art governance is broader than just logging items in a computer system.
What do you need to think about when moving art around the globe?
Again, there are the plenty of non-tax issues to consider and I’ve heard some fantastic stories about millions of pounds of paintings being moved between homes in the boot of a car. Not to be advised! From a tax perspective, it is important to know the tax status of the piece before you move it, and you should have the documentation to show this when leaving and entering different countries.
Customs and VAT are often in point here. If the art is exempt, you need to be able to prove it. And if VAT has already been paid on the artwork either on purchase or when previously brought into a country, you need to be able to evidence that this ‘VAT paid’ status has not been lost. It is, in fact, the case that some art has lost its ability to move around the EU tax free, with taxes becoming due as a result of Brexit. For example, moving a piece of art to your French Chateau which has been hanging on the wall in London for many years, but was originally bought in Paris, may give rise to VAT for the second time, even if it was paid on the original purchase.
Some UK taxpayers need to think beyond VAT and Customs, especially if they are ‘UK Res Non Doms’, benefiting from the UK remittance basis of taxation. Art coming to the UK may sometimes represent hitherto untaxed income or gains, and these funds which were used to buy the art will be taxed in the UK if the art stays for a period of time and doesn’t benefit from an exemption.
Returning to non-tax points, one should also be careful to ensure that the correct export licences have been obtained before moving artwork around the globe. Some countries do not like certain pieces leaving their shores; while other countries will not let certain pieces in. For example, if a frame is made of a certain wood or ivory it may be confiscated before it even gets to its destination – forever.
At what point does a client’s buying and selling of art become a commercial activity?
This is an important point for large collectors who may, for example, decide to refocus their collection, or keep ‘churning’ it to maintain a certain collection profile. Even where it is not a primary purpose to buy and sell art with a view to making a profit, there are various hallmarks of activity which indicate to the tax authorities that your activity is not merely that of a private collector, but of an art investor seeking commercial gain. If it is argued such, one might find that you are considered to be a VATable business, and that when you sell a piece you are required to charge VAT to your buyer.
The upside is that, as a VAT registered business, you can reclaim VAT that you have suffered on not only the art you buy, but on all the valid costs of your business. Whether VAT is suffered or charged at all will depend on normal VAT accounting rules, based on where you are buying art from and selling art to; but the point is that you may not be in a position to choose whether you have to comply with these rules depending on the nature of your art activities.
Should clients consider selling an art collection in another jurisdiction?
Not for tax reasons. In my experience the sale of art is a ‘subtle art’ (excuse the pun), and whether it be by auction or private sale, it is the market that is import. So, selling your piece at the right time in the right place is highly likely to be more important than the local taxes. Having said this, it is always important to understand your tax obligations when putting your art for sale in another jurisdiction, whether you are a private collector or an art business.
There may be local taxes that are payable on the transaction; there may also be taxes due on entry to a country but which, with the right documentation, can be suspended for the purpose of the sale. Some sales actually take place within a customs warehouse which suspends local indirect taxes, although this would not stop taxes such as income or capital gains tax possibly being due back in the home nation of the vendor.
In summary, there are many more taxes relating to owning and enjoying art than many people think. And we haven’t even covered the topic of keeping art on board yachts!
Please note that JTC does not give tax advice. Appropriate tax advice should be taken in your relevant jurisdiction.