Is your art in the right place?
05 May 2022
Arthur Byng Nelson
For some wealthy individuals a great deal of their income is spent on art or other luxury assets. Levels of spending can be such that significant proportions of their wealth are represented by their collectibles.
As a solicitor advising individuals and trustees who hold art I see a growing expectation from these individuals that their financial advisors see the wider picture and acknowledge assets of passion as an important part of an individual’s or trust’s capital holdings.
What follows is a few points of interest to bear in mind when advising collectors.
Borrowing: Art as Collateral
To the horror of some art aficionados, art can be referred to as an “asset class”. What is certainly true is that there is scope for leveraging the capital tied-up in collections: to create liquidity by borrowing against the art. Changes in laws worldwide to counter money-laundering have resulted in private banks reducing their risk appetite and therefore being more reluctant to offer such financing. COVID has exacerbated this situation. Specialist art-backed lenders have been increasingly filling the gap. According to figures published in this year’s Art & Finance Report by Deloitte art-secured loans in 2021 and 2022 are estimated to grow 19% per year for asset-backed lenders (9.4% per year for private banks) with the overall art-secured lending market reaching a projected US$26.6 billion to US$31.3 billion by 2022.
Lending Art to Institutions
Lending works of art for display in museums can increase their market value. The art market highly values exhibition histories of pieces: if the piece has been exhibited at one or more institutions its acceptance at this academic level lends confirmation of a piece’s importance and therefore its market appeal. An additional bonus for the lender is that storage costs are reduced to nil and the cost of insurance will generally be borne by the host institution. In all cases my recommendation is a written contract between lender and borrower to set out clearly the respective obligations (such as packing and shipping, copyright and reproduction rights, repair and restoration).
Three Tax Incentive Schemes for Clients with Pre-eminent Items
A broad range of assets will be considered but to be confirmed as “pre-eminent” the asset must be of national scientific, historic or artistic interest. The Arts Council have a panel of experts (supported by museum curators, scholars and members of the art trade) that determines the question of pre-eminence and agrees a value for the piece, reporting its findings to HMRC.
The Lifetime Giving One: The Cultural Gifts Scheme
This scheme was created to encourage lifetime donations by owners of pre-eminent items to cultural institutions.
The benefit for individuals is the opportunity to receive a tax credit equal to a maximum of 30% of the agreed value of the item to use against a liability for Income Tax and Capital Gains Tax (CGT). The credit can be used all at once or spread out across five years from the tax year in which the offer is made.
The scheme is also open to companies. Companies with a liability to Corporation Tax can receive a tax reduction of up to a maximum of 20% of the value agreed for the item. Companies may not spread the credit over tax years but must use it in the tax year in which the offer is made.
Subject to the rules and exceptions contained within Schedule 14 to the Finance Act 2012, the donor will not be liable for CGT or IHT on the gift.
The Kicking-It-Down-The-Road One: The Conditional Exemption Tax Incentive Scheme
When an item of pre-eminent importance is passed to a new owner, either by gift or by inheritance, the Conditional Exemption Tax Incentive Scheme provides an opportunity to defer the IHT or CGT due on that item.
In order to be able to benefit from the scheme the owner must provide undertakings. These are (a) to retain and to preserve the item (b) to keep the item in the UK except for an approved purpose and period, and (c) to make the item available for visits by members of the public.
If the item is to be transferred during lifetime (outright gifts, or gifts to trusts) the donor must have owned the property for at least six years prior to the transfer. For items transferred on death no minimum periods of ownership apply.
The item must be available to the visiting public for at least 28 days of the year and, outside of those days, available for visit by appointment.
The Payment-in-Kind one: The Acceptance in Lieu Scheme
This scheme provides individuals (often executors of an estate) an opportunity to meet an IHT liability in kind by offering pre-eminent items to the nation in lieu of IHT due. It is designed to provide an alternative avenue to selling the item on the open market to meet the tax and, thereby, to facilitate greater public ownership of items of national importance. A special feature of the scheme is the douceur, an added incentive to a potential offeror, consisting of a bonus 25% “cash-back” calculated against the IHT that would normally have been due.
As values for art increase so does the appetite for good advice. Armed with some of the information above I hope that you will be able to assist your clients to have their art in the right place.
For more information, please contact Arthur Byng Nelson on 020 8872 3018 or Arthur.firstname.lastname@example.org