This guest article examines some broad themes in the world of art collecting and investment, considering some legal angles.
This news organisation has carried a number of articles on art investing and collecting in recent years and no wonder: art is not just a potentially lucrative form of investment (albeit with pitfalls and traps for the unwary) but also glamorous and emotional. Collecting art isn’t, or shouldn’t, be just about rates of return, volatility or yield. And with these considerations of mind, it is always useful to take a look at the broad issues in the field. (For other examples of commentaries looking into specific areas and data, see here and here.)
Iris Harvey, who is a partner at Maitland, the fund administration and advisory firm, has these thoughts on the sector. As always, the editors of this news service don’t necessarily agree with all the views expressed and invite readers to respond. We are grateful for this contribution to debate.
Working with art is fascinating, even for lawyers. Art is different from most other lifestyle assets. Works of art do not have monetary value alone, but have cultural value, and as such enhance the lives of everybody with whom they come in contact.
If you are a collector, private or corporate, interested in establishing a collection which would be of real cultural interest, there will be significant legal issues to address.
Where a collection has been assembled and become more than its constituent parts, a whole range of legal issues come into play for those who own these unique and irreplaceable assets. The collection will outlive those who have assembled it and will need to be cared for and displayed in the interests of society as a whole.
It will need to avoid the pitfalls which face all accumulations of wealth, such as the claims of creditors, spouses and heirs, as well as the ravages of taxation.
The legal issues are to some extent different at the various stages in the life of a collection. At an early stage, a lawyer would typically be involved in issues on the acquisition of works for an individual collector. The collector and his art advisors will provide the artistic judgement necessary to choose the truly culturally significant items, where you would not really look to your lawyer for advice. But there are issues where your lawyer can help you. Reviews of title, provenance and authenticity all have legal, as well as cultural, aspects and the collector will need help in the process involved in purchasing, transporting, exporting and importing the works. The lawyer will finalise the contract, arrange for payment against delivery and check that the applicable local and international heritage laws are applied.
In the post-acquisition stage, the collector will typically exhibit the works. This gives the lawyer the opportunity to see the works, together with the public, as they go on display to museums and galleries throughout the world. Contracts must be negotiated, rules (such as the remittance rules in the UK applicable to non-domiciled owners of works) have to be respected and the works need to be protected from potential seizure. The contracts need to contain provisions of curatorial standards to be applied and of course there are issues of insurance while being transported, and indemnities (often from governments) when on display.
By its very nature, art is a highly illiquid asset. It has become somewhat of a trend recently for collectors to use their art works as collateral for loans from banks, thus creating liquidity while they hold their art works as long-term investments. Lawyers would be involved in documenting the loan arrangements which will usually require the collector to deliver possession of the art work to the bank or to a third party storage company and will give the bank the right to sell the art work if there is a default on the loan.
In the longer term, the collector could look for an institution to hold the collection for generations. This can be as simple as a sale or gift to a museum, which already exists and is able to discharge the ownership and curatorial functions required as well as achieving the objective of making the works available for all.
Or, at a more complex level, the collection may be significant enough to require a bespoke institution to hold the collection which will endure with the collection into the future.
The long-term establishment of a bespoke museum, large or small, is intriguing. Issues come into play such as the curatorial standards to be applied, the governance of the institution, the manner of funding and what the institution will need to do to avoid cultural stagnation.
Then of course there are the interests of those who are contributing the wealth. Family members for example may not necessarily see eye-to-eye with the collector and they will have rights in that regard.
Freedom of testation is not universally the standard. With any accumulation of wealth, the tax issues, particularly inheritance tax or estate duty, can be crucial. Capital gains tax must always be considered on any disposal of art work – art can appreciate significantly in value, which in tax terms means that capital gains tax would be due on a disposal, although careful planning may help to mitigate the liabilities which arise.
The information above has been written mainly in the context of large collections of international significance but many of the specific legal issues that arise apply equally to the small collector with a few pieces.