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:
- Acquiring and selling art;
- Transporting art;
- Maintaining your collection;
- Passing on your art collection to the next generation; and
- 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
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.
Deciding whether an individual, company or other entity should buy the artwork will depend on the context and should be considered on a case by case basis. For example, if an individual is UK resident but non-UK domiciled and purchasing art in the UK, it might be worth considering the purchase of the art via an offshore structure, 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. If you would like advice on how you might acquire and hold artwork, please contact Forsters.
B. Sale of Art
Finding the right forum
Finding the right sale forum is key to ensuring a successful sale of artwork. Usually, the decision as to whether or not a work should be sold at auction or through a private sale will depend on the nature of the work and your circumstances as seller.
Although Sotheby's is probably best known for selling works of art at auction, it is also the largest private dealer in the secondary market, making it well-equipped to advise sellers wishing to pursue either sale route.
There are many different factors that should be taken into account when weighing up whether to take the auction or private sale route. These include the type and value of the work, the pool of potential buyers, and how urgently funds from the sale are required.
Offering works privately allows you to sell more discreetly and can give peace of mind by agreeing a fixed price. If funds need to be raised quickly and the next appropriate auction date is too far away, a private sale may be the most suitable option.
There may also be significant tax advantages in selling a work of art privately to certain UK museums or institutions (this will be covered in further detail in Part 5).
On the other hand, auction sales give the work the greatest exposure to potential buyers and the final purchase price is, in theory, limitless! It is important to liaise with the auction house to set attractive and realistic reserve prices and auction estimates before the sale to give your work of art the best chance of success.
To discuss the most appropriate sale route for your work of art, please contact Sotheby's.
If you are a UK resident and do not claim, or are not eligible for, the remittance basis of taxation, there may be UK capital gains tax (CGT) to pay if your artwork has increased in value between the date you acquired it and the date of sale. Currently, CGT is charged at 10% at the basic rate and 20% at the higher rate.
Certain exemptions from CGT are available. For example, so-called 'wasting assets', which include clocks and watches, are exempt from CGT, as are individual objects sold for £6,000 or less. Be wary when it comes to selling items that are part of a set: you will only benefit from the CGT exemption if you sell all or part of the set for less than £6,000, or if you sell parts of the set to different people, with each part being sold for £6,000 or less.
In addition, each individual has an annual CGT-free allowance, which is currently £12,300 per year (although note that this will reduce to £6,000 from April 2023). If a work is being sold by more than one person jointly, then the individuals' annual CGT allowances can be combined. If you are married, you might consider giving half of the artwork to your spouse before the sale (a transfer which will usually be exempt from both CGT and inheritance tax) and selling the artwork jointly to benefit from your combined annual CGT allowances. Please note that if the spouses do not share the same domicile, there could be an inheritance tax issue, so ensure advice is taken before any planning of this nature is carried out.
A UK resident with tax exposure in other jurisdictions should be mindful of liabilities on capital gains that may arise in those jurisdictions as a result of the sale and should consider whether any tax treaties between the UK and the jurisdiction in question would protect against the risk of double taxation. Please contact Forsters if you would like some further advice in relation to tax implications of selling your artwork.
In the next part of this mini-series, we will be considering the implications of owners transporting their art to or from the UK.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.