When an artist dies, his or her work forms a tangible and emotional legacy. How should this be managed, by whom and for whose benefit? This article looks at particular estate planning issues for artists.
Anyone who makes a will or who is considering lifetime estate planning must ask themselves: what do I have to give? Whom do I wish to benefit? What is the cost (in expenses and tax) of implementing my wishes?
For artists, there may be strong competing factors: the wish to preserve an artistic legacy and the wish to provide for family and other beneficiaries. Typically, an artist’s heirs and family will feel a strong sense of stewardship, and responsibility that an artist should be remembered in the “right way”. Working out what that looks like requires careful thought.
The more an artist is able to be involved in the process, curate his or her own legacy and communicate this to the people who need to know, the easier it will be for his or her heirs.
Where to start and what to think about?
There will be a range of issues: from how to deal with the catalogue raisonné, copyright, practicalities of storage and insurance, to relationships with dealers and museums. Often there will be international aspects. Some artists wish particular works to go to museums or galleries, some wish to establish a charitable art foundation. Some have no interest in leaving a public legacy at all. There are specific challenges where an estate is valuable but illiquid and this is where strategic planning is so important. In the short term, how will the estate provide for dependants or perhaps a trusted assistant? The vision needs to work in reality. Who will be best placed to deal with the practicalities? What trusted advisers are already involved who might provide valuable input? Are there steps that can be taken now to facilitate future planning?
Capital taxes and tax exemptions
Inescapably, where art represents significant value in an estate then inheritance tax (IHT) and other capital taxes will be in point. Items may need to be sold to pay the tax bill or other solutions found. Hard decisions may need to be made and it will be invaluable to understand the artist’s wishes here. There are also a range of exemptions that may help. It pays (literally) to bear these in mind.
Every individual who dies domiciled in the UK or who dies leaving UK assets has a tax-free exemption, currently £325k. Above that level, the rate of inheritance tax (IHT) is 40%. IHT can be avoided altogether if an item is gifted to an individual, and the donor survives for 7 complete years from the date of the gift.
Valuable works of art are subject to capital gains tax (CGT) if gifted. From 6 April 2016 the rate of CGT is 20%. There is an automatic CGT “uplift” on death to market value at the date of death.
A different tax analysis will be required where art is owned as part of a business.
Turning to exemptions, a gift to a surviving spouse will be exempt from IHT, provided that the donee spouse is domiciled in England and Wales or makes a special election. As food for thought, the main exemptions that can affect artists’ estates are set out below. It will be important to be aware of the interplay of different taxes for the same event, and proper advice will be key.
- Gifts to charity. There is a total exemption on gifts left to charity on death. Further, there is a reduced rate of IHT applicable to estates where on death over 10% of the value of the estate is left to charity. Instead of being subject to the standard inheritance tax rate of 40%, the estate is taxed at 36%. For more detail, please see the flyer: Charitable Giving By Will.
- IHT Business Property Relief. Where art forms part of a business (for example the artist is a sole trader) then business property relief (BPR) may be available. IHT BPR can give 100% relief from IHT on death or lifetime gift. The specific IHT rules must be checked carefully.
- Conditional Exemption. Where an individual who receives an asset wishes to retain it, but is conscious of the effect on their overall tax burden, it may be possible to take advantage of the conditional exemption scheme. This renders objects which form part of the scheme free of IHT and CGT, provided that the objects are “pre-eminent” and their new owners comply with certain requirements. Items which are conditionally exempt are listed on the HMRC website, to be found: http://www.hmrc.gov.uk/heritage/colsearch.htm.
- Acceptance in Lieu (AIL). Where IHT is payable, the acceptance in lieu scheme can be used both to make a gift of art to a cultural institution, and to reduce the tax bill of the estate. In essence, where an item is accepted as part of the scheme, HMRC will use the open market value of the item as its value, then remit 25% of the tax that would be payable to the estate and there is no tax on the item given. AIL enables museums, galleries and libraries to receive important objects at no cost, and can be an advantageous way for transferors to make gifts to their favourite institutions with an added tax incentive. Among those items which have been gifted under the Scheme are John Constable’s The Valley Farm and paintings by Sir Winston Churchill.
- Cultural Gifts Scheme. CGS was introduced by the Finance Act 2012. CGS is not an IHT relief but it can be used to make a lifetime donation of an item to benefit a cultural institution, while receiving a reduction on the donor’s overall tax bill. Once the object has been accepted into the scheme, a percentage of the item’s value can be offset against the individual’s income tax or CGT liability. The maximum value of the reduction is 30% of the agreed value of the object, and the reduction can be spread across a maximum of five tax years Items gifted under the Scheme include a collection of ceramics formed by Alan Caiger-Smith, and Sir Cedric Morris’ Cabbage.
Bringing it all together
At Boodle Hatfield, we have been advising clients for almost 300 years. We act for artists, collectors and Foundations. We deal with the most complex estate planning issues, and we are skilled at presenting them to clients in a straightforward and practical way.
Artists’ estate planning gives rise to particular challenges. We give our clients a clear road map to make decisions so that they are able to curate their own legacy and secure peace of mind for themselves, their family and friends.