Legal Industry News
Welcome to The KCJ News Service
The Art of Effective Planning
Practice area: Wills, Estate Planning & Probate
Mary Ambrose
As a result of its history, University, and geographic location, Cambridge and the surrounding area is probably home to more than its fair share of people who are comparatively affluent and are also interested in art. For those who have either inherited or built up an art collection there is often a dilemma – how to carry on enjoying the art but nevertheless ensure that it does not form part of a taxable estate in years to come. Mary Ambrose, a tax specialist solicitor at East Anglian law firm Kester Cunningham John, looks at some of the options.
There are four broad approaches to this problem. The first is to establish a charity and donate the art collection to it. The second is to obtain a conditional exemption from Inheritance Tax. The next is to ensure that the art works are used in such a way that they qualify for Business Property Relief. Last but not least is the option to give the works of art away and then lease them back again. Not all of the options will be available to everyone; much will depend on the nature of the works of art.
The charity option has been favoured by many people. Its viability relies, however, on being able to establish that the works of art will advance the education of the public. So not only do you need artworks which are of sufficient merit, or have sufficient educational value, to meet the criteria but you also need to allow comparatively high levels of public access to them. In the majority of cases this is likely to mean seven days a week access for six months of the year. There are some exceptions, for instance if something is only of scholastic interest then it may be restricted to visits by appointment by academics. Interestingly the Charity Commission is on record as saying that in appropriate cases it will allow computer simulations, videos, TV coverage and so on instead of full physical public access. There may also be other options such as renting the works back from the charity for set periods to avoid having to make them available to the public on an ongoing basis.
If you don't wish to look at donating your works of art to charity then, in a limited number of instances, you might qualify for a Conditional Exemption from Inheritance Tax. This is an exemption with a history dating back to 1896 and is designed only for museum quality artworks and historic houses. The quid pro quo is that the items and the historic house in which they are kept will fall outside the Inheritance Tax regime as long as the assets are preserved in good condition, kept in the UK, and the public are given reasonable access to see them.
Another alternative is to find an effective way to ensure that your works of art qualify for Business Property Relief. The detail of what qualifies and what does not is complex but broadly if you have an historic house containing works of art and open it to the public in the expectation of making a profit then it can be classed as a business. The key is to ensure that the whole of the asset or collection qualifies for relief. A tax tribunal case in 2004 examined this issue in detail in relation to a house where only 78% of the interior was open to the public while the other 22% was the owner's private residence. Interestingly, the HMRC argument failed because the Tribunal decided that since the whole of the exterior of the building as well as 78% of the interior was open to the public, the Hall in question had to be considered as a single asset and was a vital backdrop to the business.
The final solution is to give the works of art away and then lease them back at full market rent. The key to the success of this arrangement is the phrase 'full market rent'. If anything less is paid then all sorts of problems arise in relation to the 'gift with reservation of benefit' rules and 'pre-owned assets' tax. Of course, in addition to the issue of what constitutes an appropriate market rent, there is also the tax efficiency of the gift. If you are passing the paintings or property on to your adult children, they will then be liable to pay tax on the rental income unless you opt instead to capitalise the rent and make a one-off payment.
A much more detailed paper on the subject co-authored by Mary Ambrose and charity law expert Robert Meakin, or individual advice if required, can be obtained by contacting Mary Ambrose on mary.ambrose@kcj.co.uk or 01223 431102.
More information...
← back to news
