05 July 2022 - Article
As individuals become more mobile and society increasingly international, there is a growing awareness that the tax policy of different jurisdictions can influence lifestyle choices. Many art collectors are, by their nature, wealthy and relatively footloose and their collections are generally portable such that they can, if so minded, amend their pattern of living to achieve a different tax result. Accordingly, it is worthwhile considering whether the UK is a jurisdiction in which art collectors could consider residing without exposing themselves to too great a tax burden. Before considering the UK tax regime, however, it is worth noting that the tax issues applicable to collecting art are different to those applicable to dealing in art such that this overview does not consider the tax treatment of UK art dealers and other art-market professionals.
In considering the UK as a jurisdiction, it is useful to review each of the principal direct UK taxes relevant to an art collector. It should, however, as a starting point be noted that no wealth tax is levied in the UK. Wealth tax systems essentially tax net worth on an annual basis and tend to be applied against a percentage (typically between 0.8% and 2.5% per annum) of net worth in excess of a certain level. France, Greece, some Swiss cantons and Sweden presently impose forms of wealth tax. Unless an exemption can be found (certain objets d'art and antiques being items more than 100 years old can be exempt from French gift tax for example) such a regime makes the holding of any valuable collection unattractive.
1. Inheritance tax
The UK is relatively benign in that it will not tax a collector annually simply for having a collection. Will it, though, tax the collector punitively on their death?
Most developed tax jurisdictions have a particular taxation regime that taxes capital on death. It should be noted, however, that there are a number of exceptions to this proposition such as Canada. In Canada, however, an income tax charge often arises on death based on the assumed disposal by the deceased of all of their worldwide property. In practice, this income tax charge can (where the deceased had latent capital gains in their property) be as significant as an IHT charge would have been.
In summary, UK inheritance tax (‘IHT') is charged on the value of an individual's estate at his death and on the value transferred by certain lifetime gifts such as gifts to trusts. Gifts between spouses and civil partners are generally exempt from IHT. Gifts to UK registered charities are wholly exempt and all individuals have an IHT exemption, presently of £312,000.
IHT applies to the worldwide assets of individuals domiciled in the UK but only to the UK assets of non-UK domiciled individuals: accordingly, a non-UK domiciled individual should be aware that a UK IHT exposure could arise to the extent that he keeps art in the UK unless these are left by exempt gift (i.e. to a spouse or to charity) on death. Residence is not relevant in determining a person's liability to IHT except to the extent that long residence may cause an individual to be deemed domiciled in the UK: for IHT purposes an individual is deemed to be UK domiciled after 17 years of UK residence. It is often possible for non-UK domiciled individuals to avoid UK IHT on UK assets by holding them through an offshore trust/company structure or by borrowing against the asset so reducing its value for tax purposes.
UK IHT exposure can be mitigated through giving to spouses/civil partners or charities and, for non-domiciled individuals, through careful estate planning. The UK also has a regime under which items of particular significance can be exempted from IHT, but this is dependent on conditions such as the right of the public to view the items.
2. Capital gains tax (‘CGT')
UK residents are, prima facie, liable to CGT on gains made on disposals of artworks. The rate of CGT is now 18% – it was previously the taxpayer's top rate of tax so, normally, 40%. The 18% rate compares favourably with rates in other jurisdictions – in the US, the rate of income tax on art gains can be 28%. Costs associated with effecting a disposal or improving the asset disposed of can be used to reduce the CGT charge while all individuals have an annual exemption of £9,600.
The UK has been a favourable jurisdiction for the globally wealthy because of the remittance basis of taxation. The remittance basis is available to non-domiciled individuals and means that they are only subject to UK tax on foreign income and gains ‘remitted' (i.e. brought into) to the UK. To claim the remittance basis of taxation, an individual must pay an annual charge of £30,000 after they have been a UK resident for seven years. It is presently unclear whether this charge can be credited against foreign tax.
A non-domiciled person can avoid a charge to UK CGT by disposing of an artwork outside the UK, claiming the remittance basis of tax and not bringing the proceeds into the UK; further, non-domiciled persons may still be able to establish offshore trusts that can in some instances prevent gains on disposals of assets in the UK becoming chargeable to CGT.
3. Taxation of remittances
Before the Finance Act 2008, a remittance charge could be avoided by using offshore income to buy moveable property such as artworks outside the UK. This property could be brought into the UK without a tax charge so long as the property was not sold in the UK. Following the Finance Act 2008, a UK tax charge will, prima facie, arise if offshore income and gains are used to buy artwork outside the UK which is then brought into the UK. The top rate of UK income tax is presently 40%. This provision may not apply to art brought before 11 March 2008 – further, it should be noted, there are exemptions which will apply in some instances for artworks being brought to the UK for public display in an approved establishment, assets (including art) brought into the UK for repair or restoration and assets (including art) brought into the UK for less than 9 months (e.g. for display in a commercial gallery). These exemptions were introduced recognising the importance to the UK economy of its art market and can allow a collector some flexibility in terms of bringing overseas artwork into the UK.
In summary, and by way of general overview, the UK is a jurisdiction with a tax regime that can if not carefully managed bite an art collector but, at the same time, it has advantages: UK IHT exposure can often be managed through careful estate planning and there is no wealth tax; UK CGT is at a relatively low rate and may not be applicable to a non-domiciled individual.