“My daughters do not necessarily share my passion for the art I have collected,” says Clare Maurice, a tax and estate planning lawyer for private clients. “Like jewellery – fashion changes. You can imagine that one generation of the Royal Family likes Canaletto in the Royal Collection. And the next might not,” she adds.
This can ring true whether you collect great works of art, watches or antiques. After spending a lifetime collecting valuable items, how can you ensure they are treasured in the future? And how can financial planning help you to preserve your collection’s value? Some give items to charity in a bid to share their passion, others sell their collection and some set up a trust.
While tax should never be the sole consideration, its impact can be substantial as it can be an important influence on the value of your collection. “You may want to consider giving objects that are below the capital gains tax threshold to the next generation and focus your financial planning on more noteworthy items,” says Orlando Rock, Chairman of Christie’s UK. “Is there anything that you want to keep for your children? Is one item so much more valuable that you need to sell it to pay taxes? How do you maximise the value of the most expensive item?” he asks.
When making these decisions it is always recommended that you consult your family first. “Never underestimate the family dynamic,” says Clare, Senior Partner of Maurice Turnor Gardner LLP. From giving art in lieu of inheritance tax (IHT) to establishing a Charitable Incorporated Organisation (CIO), this article looks at six options for collectors looking to pass on passion projects.
- Giving in lieu of tax
When Sir Ilay Mark Campbell, the seventh Baronet of Succouth, passed away in 2017, his estate faced a hefty tax bill. Anyone who is UK-domiciled – or owns assets located in the country – is liable to 40% inheritance tax (IHT) on death.
Lady Campbell and her family decided to take advantage of the UK’s Acceptance in Lieu Scheme by instructing Christie’s to negotiate a van Dyck painting, titled “Marchesa Lomellini”. The scheme is set up for pre-eminent objects of national, scientific, historic or artistic interest to be given to the public, instead of paying IHT. A panel of experts value the objects offered and then assign them to public institutions. The Campbell’s van Dyck was accepted in lieu of £2,450,000 in tax and will be on display in Glasgow’s Kelvingrove Art Gallery and Museum from 18 November 2021.
While this process means that families part with valuable items, it offers significant tax savings. Objects can be worth more in real terms if offered in lieu of IHT than if they are sold on the open market, with around £60 million gifts being accepted by the Treasury every year.
- The Cultural Gift Scheme
Of course, Sir Ilay Campbell did not get to see his painting being enjoyed by the public. For those who want to benefit in their lifetime, the Cultural Gift Scheme allows collectors to write off up to 30% of CGT or income tax liability with items that are placed in museums and galleries over up to five years. If the collector passes away during this time, they don’t have to pay CGT or income tax so it is deferred indefinitely.
“The tax relief is slightly less compelling than acceptance in lieu, but it allows you to see your collection being enjoyed by the public, even late in life,” says Orlando. “Usually, people want a pre-eminent work of art to be negotiated to a gallery of their choice and often with their name attached to it. Regional and smaller galleries are thrilled to have this,” he adds.
- Conditional exemption
Another way that the UK government encourages people to open their collections for public display is through the Conditional Exemption Scheme. If collectors allow the public to view items in their own homes or loan them to public institutions, they can apply for IHT and CGT relief.
Accepted items must be available for public access for at least 28 days a year with the viewing publicised. Clare describes this option as being less favourable as it gives the Government an equity stake in your collection. And the object’s value is set on the date it is accepted into the scheme. If some years down the line, the family wants to sell an item that has been made exempt, the tax that is clawed back will be based on the date of sale value, not value at the date the owner passes away. “If you can avoid this, you should, but it may be better than the object leaving the family completely,” Clare explains.
- Selling your collection
Selling art and collectables may seem like the most straightforward option, but it is often one of the most expensive ways of passing on a collection. Donating collectables outright often leads to a higher return on investment via tax deduction. During a collector’s lifetime, they have to pay CGT of 20% on the profit made from selling any collectables. If the collector dies and the next owner decides to sell the collection, CGT is based on the items’ value when the former owner passed away. The item’s market value is included as part of the estate for IHT purposes. Along with taxes, the seller will be responsible for paying a sales commission and possibly shipping costs too.
- Giving to charity
Gifting your collection may not bring you maximum value either, but there are benefits for those with a philanthropic mindset. Gifts left to charity in your will are not only free of IHT and CGT, but also offer tax breaks for the collector’s estate. If you give at least 10% of your estate to charity, the remainder will only face 36% IHT – as opposed to 40%. This is based on the object’s value at the time of the gift. If you give in your lifetime, the gift does not attract IHT or CGT, but the owner also cannot claim any tax relief on the rest of their estate.
“Collections tend to comprise a handful of key works alongside a larger volume of lower value items,” says Orlando. If your chosen charity is a museum or gallery, it is unusual for an entire collection to be displayed due to space restrictions. However, some collectors have given an endowment to build a special room to house their full collection. “The most important thing is to start working with curators early to get them on board with your vision for your collection,” he says.
It is a donor’s prerogative to specify any conditions attached to the collection. For example, whether the items should be displayed in a specific wing or include the collector’s name next to the description. “These conditions should be articulated and agreed upon before the delivery of the artwork,” says Orlando. However, he warns that “arduous conditions could jeopardize the successful conclusion of negotiations for charitable deductions for income and tax purposes or potentially even reduce the value of the collection.”
- Set up your own charity
Offering protection in life, death, divorce and bankruptcy, putting collections into a charitable structure is a popular choice for collectors. By placing them outside of your estate and into a structure that attracts charitable tax relief, there is no IHT or CGT on objects that are gifted when the donor passes away. If the charity has to sell the collections for any reason, there would be no CGT on the sale proceeds.
This is usually done through one of three legal structures: a charitable trust, a charitable company limited by guarantee, or the relatively new charitable incorporated organisation (CIO). All are legally recognised as charities but have distinct characteristics.
All of these structures allow a collector to keep the collection intact for the benefit of the public. It often remains under the influence of the family or of independent trustees. The trustees or directors have a duty of care under UK charity law and all charitable structures should qualify for the generous range of tax relief available in the UK.
The value of the art will not be inherited by the collector’s family, but family members may be nominated to manage or oversee the collection. This can be a key part of succession planning while also supporting the collector and their family’s wider philanthropic goals.
“I recently worked with two gentlemen who were passionate about the 19th century and wanted to support the academic study of this era in their wills,” says Orlando. “They decided to establish a trust to promote education and grants to museums who champion that era. A collection sale was written into their wills and the proceeds of that sale went into the trust,” he explains.
The main differences between these structures centre around regulation, liability and practical ease of use, explains Lyn Tomlinson, Head of Philanthropy and Impact at Cazenove Capital. “In charitable trusts, the trustees have personal liability. This has led to many charities registering as a company to limit liability,” she explains. Additionally, companies can contract with other organisations and can be easier to understand than trust-based arrangements. “More clients understand how a company works than a charitable trust,” agrees Clare.
But there are downsides too. From a regulatory perspective, charitable companies must file and report to Companies House and The Charity Commission. “Company law was not designed for charitable organisations. All of this has added further complexity and cost,” says Lyn. To address these issues, the charitable incorporated organisation (CIO) was introduced in 2013 as the first legal entity designed for charities. It offers limited liability and the ability to contract as a company, but under a simplified reporting regime.
"One of my clients is passionate about his collection, having spent his last three decades getting to know the artists. He wanted to give it a life while he is alive as a way of sharing his passion" - Clare Maurice
“One of my clients is passionate about his collection, having spent his last three decades getting to know the artists. He wanted to give it a life while he is alive as a way of sharing his passion,” says Clare.
After working with his advisors, the client decided to establish a CIO to hold the bulk of his collection. “The items were free of CGT and IHT as they were gifted to the CIO. However, there is no gift aid tax relief as it doesn’t yet extend to gifts of chattel,” says Clare.
The structure means the client continues to have a great deal of influence over the collection and how the CIO fulfils its objectives. It even employs its own curator. “It is more engaging than leaving it in the hands of a museum,” says Clare. Although, she adds that this was only possible because the client had the liquidity to endow the CIO with cash. Some collectors may not be able to afford to do this.
“We didn’t want a trust because of the personal liability that trustees take on. A CIO is the preferred option these days,” says Clare. “It is a separate legal entity that contracts in its own name and is subject to the full weight of charity regulation.”
However, as the new kid on the block, the CIO has run into several issues with donors and others being unfamiliar with the structure. “Clients who are looking to establish a charitable vehicle should seek specialist legal advice to make sure that they establish the right vehicle for their giving needs,” says Lyn.
When considering all the options available for your collection, it is recommended that you consult experts who understand estate planning, the nuances of the art and collections world and specific law around museums and galleries. These are not the same for everyone, for example exempt works of art are often treated very differently to those that aren’t. Specialists can help you to select the best option for your objectives, while achieving optimal tax efficiency.
Collectors that start working with advisors early on to discuss these issues are best positioned to maximise the value of their collection, says Orlando. “Collecting is a very personal journey and the owner quite rightly often has strong views on it. You need to pursue a bespoke course of action that is right for the individual,” he adds.
Pricing collections in a pandemic
As an industry based on the physicality of objects, Covid-19 created particular challenges for the arts and collections world. Museums and galleries were closed, while social distancing threatened auction house crowds.
“During the pandemic, some collectors chose to sell things privately rather than at public auctions. And, there was certainly some concern that having fewer attendees at auctions might negatively impact sale prices,” says Orlando Rock, UK Chairman of Christie’s. However, the art and collections markets remained strong during national lockdowns.
Auctioneers were forced to innovate and embrace digital sales. The sixth painting (Version F) from Picasso’s series of 15 canvases, “Les femmes d’Alger”, was sold in the first auction of its kind that was streamed in Hong Kong, Paris, London and New York. Virtual auctions have also attracted new buyers. In the first half of 2021, Christie’s saw new buyers increase from 26% to 2019 in 30%, with two thirds of this group joining online sales. Female buyers also increased from 27% in 2020, to 31% this year.
Auctioneers relied on digital valuations where possible during the pandemic, particularly when they had seen the objects before. Christie’s did isolated client visits and found HMRC were pragmatic if they had seen the items in the last five years. However, to give a full valuation for tax valuation auctioneers need to examine works of art in person. “The pandemic was a very interesting phase,” says Orlando. “What was much more difficult was valuing things that we hadn’t seen before. Nothing replaces looking at works of art. It allows you to understand the condition, quality, subtleties and colour,” he adds.
How much is your collection worth?
“While we hope people are passionate about their collections, they are also a good alternative store of value. For some clients, their collections are among their most valuable financial assets,” says Orlando Rock, UK Chairman of Christie’s.
This is particularly pertinent in the fall out of the pandemic, as governments have engaged in quantitative easing which has bolstered many alternative assets, including art and collections markets.
Understanding the value of each item is vital when financial planning. These valuations will need to be regularly updated too, as arts and collections markets have become increasingly polarised in recent years. “There is the best, and then the rest – and they have followed divergent trajectories,” Orlando says.
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This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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