You may have valuable art in your possession that you have considered selling. However, turning these valuables into cash can be an expensive process. Often the largest item of outgoing is tax.
A work of fine art is potentially liable to capital gain tax on its disposal. A disposal occurs when the asset is sold, when insurance monies are received or when the asset is transferred as a gift. Where donated, the market value at the date of the gift is used to establish any gain.
Essentially, capital gain is the amount by which a piece of fine art has increased in value.
How can I reduce my capital gain tax?
For assets acquired before 31 March 1982, the value at this date is used rather than the original cost. Any increase in value prior to this date is effectively free of capital gains tax.
Costs which can be deducted from capital gains for tax purposes include those of improvement or restoration and fees paid in relation to any transfer, such as, to auctioneers and valuers.
Do you know the exemptions?
An object of art is usually a “non-wasting chattel” for tax purposes because it has an expected life greater than 50 years. Any non-wasting chattel bought and sold for less than £6,000 will be exempt from capital gains tax. There may be further tax relief where an artwork is sold for less than £15,000.
Most taxpayers are entitled to the annual exemption. Total yearly gains below the annual exemption (of £10,600 for 2012-13) would not be taxed.
What happens if I make a loss on the sale?
Although a loss is undesirable, disposing of a work of art for less than it cost can at least have a tax benefit. A capital loss is carried forward indefinitely and used to reduce the next available capital gains which are above the annual exemption.
The amount of loss on a non-wasting chattel, such as a work of art, however may be restricted. Where the asset costs more than £6,000 the disposal proceeds will be deemed to be £6,000 when calculating the loss for tax purposes.
It is not a requirement for the loss to be used against a gain made on the same type of asset, however. As an example, a loss made on a share could be carried forward and set against a gain made on a painting.
What about inheritance tax?
Items of art are likely to form part of the estate for inheritance tax (IHT) purposes. To the extent that the total value of the deceased’s estate is more than the nil rate band (of £325,000 for 2012-13) tax is payable at 40%.
The value of an asset for IHT purposes is based on the loss to donor principle. The value is the amount by which the estate depreciates as a result of the transfer. Therefore, where an asset is being sold as a set, to the same person, or same group of people acting together, the value of the set, rather than the value of each piece considered separately, is used for IHT purposes. It is also a requirement to take account of any related property, such as that held by a person’s spouse.
Tax incentives if I give artworks to a public institution or charity
Certain assets qualify for conditional exemption from capital gains tax and inheritance tax. Under the conditional exemption scheme, a painting would be exempt from capital taxes if the new owner agrees to preserve the painting, make it publically available and to keep it in the UK.
It is a common requirement for a painting to be held on public display for at least 28 days annually and consequently owners may come to an arrangement to loan any conditionally exempt pieces to a gallery for part of the year.
If the conditions are not met, or if the owner wishes to withdraw from the scheme, then the asset would be potentially liable to tax.
The government uses agencies such as Museums and Galleries to determine whether an item will qualify for the scheme.
It may be more practical for artwork subject to conditional exemption to be loaned to a gallery for part of the year, in order to satisfy the requirement for public access.
The conditional exemption scheme offers a way for keeping works of art in family hands, rather than having their sale forced to pay for inheritance tax. Where you aim is to sell an artwork, and it qualifies for conditional exemption, then a private treaty sale could be a suitable alternative.
Under the arrangement, HMRC agrees to give the purchaser 75% of the tax you would otherwise pay, and to give 25% of this tax to you. In effect, you receive a douceur, or sweetener, for disposing of art you own privately to an institution where it must be publically accessible.
A similar arrangement, known as payment in lieu of tax is where the transfer of a ‘pre-eminent’ item is made to a public institution instead of tax. In this case, the artwork itself is offered in payment of tax. Again, HMRC offer you a tax sweetener. The purpose of the arrangement is to keep art in the UK where it will be publically accessible.
Gifts to a charity are not liable to inheritance tax, and therefore an outright gift may be a more suitable alternative, such as, for lower value items than seeking conditional exemption or a private treaty sale.
A checklist for avoiding tax on fine art
- If an asset is jointly owned then there would be two lots of annual exemption to reduce any capital gains on disposal. As spousal transfers are effectively tax free, tax can be saved by transferring an artwork into joint names prior to sale.
- Any unused annual exemption will not be available in future years. Therefore, you can save tax by disposing of assets in different tax years.
- Any gains above the annual exemption are added to income for the tax year to calculate tax. Where total income and gains are below the higher rate tax threshold, gains are taxed at 18%. Thereafter gains are taxed at 28%. You could save tax by selling any valuables when you expect your income to be lower.
- You can reduce your tax liability through the sale of loss making assets before assets giving rise to a gain. Capital losses cannot usually be carried back, however they can be carried forward indefinitely.
- Non UK residents would only be subject to UK capital gains tax on their assets which are located in the UK. The same rules would apply to a person who is not domiciled. However there could be adverse tax implications, such as loss of annual exemption, by claiming to be non-domiciled. There is a further charge to pay for non-domiciled individuals who are in the UK for more than seven out of the previous nine tax years.
- Death creates a capital gains tax free uplift in value. If you have a lower value estate, there may be less tax advantage to disposing of an asset during your lifetime than on their death.
- If asset is sold at undervalue to connected persons (such as certain family members) then the market value is used to determine any taxable gain or allowable loss. However a loss made on a transfer to a connected person can only be set against a gain made to the same person.
- Artwork held on business premises may be tax-deductible. Where an item of décor is chosen to create an atmosphere which assists with your business, then the cost of décor could reduce taxable profits.
- In certain situations, trusts, LLPS and companies may be used in any tax planning to reduce exposure to tax on private wealth.