The idea of owning fabulous art works will appeal to many but what happens to descendants who might be faced with a large inheritance tax bill? In the UK, there are ways of tackling the issue - and keeping art in the public eye.
The following article examines “heritage assets” – such as artwork – and issues arising for those making and receiving bequests. An obvious issue is tax. This commentary about the UK landscape is from Ann Stanyer, partner of Wedlake Bell. This publication’s editors invite readers to respond.
The recent announcement by the UK’s Arts Council of a list of art works for sale under private treaty is a timely reminder of the tax breaks that are available for art collectors. The list is on the Arts Council's website and consists of works which have previously been granted “conditional exemption” from both inheritance tax and capital gains tax.
Conditional exemption relief is granted to heritage assets where, for example, an estate wants to keep an item in the family after an owner's death when an IHT charge would otherwise arise. It also applies for certain lifetime gifts of heritage assets which give rise to an IHT charge. The effect of the relief is that the inheritance tax is deferred until the item is sold or there is another triggering event.
The relief is granted provided the owner can satisfy HM Revenue & Customs of the following:
1. The asset must be considered by the panel of experts to be "pre-eminent". This means it meets one or more of the following criteria:
1.1 has an especially close association with our history and national life;
1.2 is of especial artistic or art-historical interest;
1.3 is of especial importance for the study of some particular form of art, learning or history; or
1.4 has an especially close association with a particular historic setting.
2. Undertakings must be signed by the owner in favour of HMRC, which will include allowing "reasonable" public access to the item, preserving the item and keeping it in the UK.
If any of the undertakings are breached, this is a triggering event for the deferred inheritance tax. The public access requirements could be satisfied by an owner by loaning the item to a museum or gallery for the relevant part of the year.
Although a sale of the art work at a later date generally triggers the deferred IHT, there are tax advantages if the sale is made via the private treaty sale route. Ordinarily, IHT is payable at a rate of 40 per cent, but under this scheme, if a conditionally exempt article is sold to a national institution, a "douceur" (or sweetener) is offered to the seller of 25 per cent of the value of the item, which reduces the IHT that would otherwise be payable. At the same time the buying institution only has to find 75 per cent of the purchase price. In this way the financial advantages are shared between the seller and the museum or gallery.
The list of applicable national institutions includes the National Gallery and British Museum but also includes the National Trust, Natural England and the National Art Collections Fund. The list of institutions is set out in statute and is updated from time to time.
The conditional exemption scheme is just one of the tax breaks available for art collectors; others include the “acceptance in lieu” (AIL) and the “cultural gift” schemes. The latter took effect from 1 April 2012 and provides income tax and CGT relief to collectors who are willing to gift heritage works to the nation. The AIL scheme offers executors a cost effective way of settling the IHT due on a heritage asset on the death of a collector. The item can be offered to the nation in full or part payment of the IHT liability on that asset and/or any other chargeable assets in the estate. While it means parting with the asset, it saves the need for the executors to find a private buyer and ensures that the wider public can benefit from the item. The AIL scheme applies to a wide range of assets, including land and buildings as well as art and other valuable objects. Such items have to be suitably “pre-eminent”, assessed against the same criteria as referred to above.
The forthcoming private treaty sales include a diverse range of works of arts including a painting by Modigliani, items of furniture and a series of three English tapestries from about 1700. There is three months' notice of the sales so that a relevant institution can try and find the funds to purchase at an attractive reduced price. Clearly their ability to do so is dependent on available funds and whether the item in question will add to their existing collections.
Heritage assets generally become more valuable with time, which, whilst pleasing from an investment perspective, can produce a headache on death for those left behind who will need to pay IHT at 40 per cent on the item. However, the private treaty sales are a reminder to those who own (or are contemplating) valuable works of art or other heritage assets that such assets need not be viewed as a ticking tax time bomb, and provided a collector checks that their assets qualify under one or more of the tax breaks available, they can sit back and enjoy the item with far greater peace of mind.