taxation of works of art and chattels
Careful planning is needed to ensure that valuable works of art
and chattels can be passed down to the next generation in the most
tax efficient manner. Tax planning is also needed if you decide to
sell the family silver and realise that ‘cash in the attic’.
Here we consider some of the
exemptions available to help reduce and, in some cases, avoid
altogether inheritance tax and capital gains tax becoming
payable.
inheritance tax (IHT)
potentially exempt transfers
The most common way to avoid IHT as well as capital gains tax
(see capital gains tax below) is for individuals to give away
assets to family members. Provided the person making the gift
survives seven years from the date of the gift no IHT is payable.
If the person does not survive the seven year period, then the gift
is set against their nil rate band, meaning that less is available
for the executors of their estate. One important advantage of
making a gift, especially of an item that is likely to increase in
value, is that it freezes the value of the gift at the date it is
transferred. If it had been retained, the value at the individual’s
death would be taxed.
gift and leaseback
Many families want to retain enjoyment of their paintings and
antiques etc, whilst at the same time making a gift of them to
their children to avoid tax. This is possible provided that the
person making the gift is prepared to pay an annual rental or a
premium, then the chattel can be leased back to them and will be
kept outside of their estate for IHT purposes. They will of course
also need to survive the seven year period. If ‘full’ consideration
is not paid, then the Revenue could treat the chattel as remaining
subject to the donor’s estate under the gift with reservation of
benefit rules. In general, the rental is usually fixed somewhere
between 0.5% and 1%. For example, chattels that are valued at, say
£1 million, could be leased back to the former owner for a
relatively modest rent of between £5,000 and £10,000 per annum.
conditional exemption
If an individual owns assets such as books, manuscripts,
paintings, ceramics, land or buildings that are important to the
UK’s national heritage then inheritance tax can be deferred on
those assets, provided that the recipient of the asset
gives specific undertakings to HMRC to
look after the asset, allows the public reasonable access to it and
keeps it in the UK. The asset must be judged preeminent by experts
to qualify and this can be a difficult test to satisfy.
capital gains tax (CGT)
CGT is charged on the disposal of an
asset. A disposal is usually an occasion when you sell an asset or
give it away. For this purpose the gain is the difference between
the value at which you acquired the asset and the open market value
at the date of the gift. If you are a higher rate taxpayer the rate
is 28%, whilst for basic rate taxpayers it is 18%. CGT is a factor
that worries many people when considering selling or giving away
their chattels. In practice, however, this may not need to be the
case as leaving aside the annual exemption (currently £10,100
available to individuals) there are a number of reliefs and
exemptions.
chattels of low
value
Special rules apply to exempt from tax the sale of any chattel
with gross sale proceeds of less than £6,000. If the gross sale
proceeds exceed £6,000, a form of marginal relief is available.
This has the effect of excluding from the gain the amount by which
the gain exceeds 5/3rds of the amount of the proceeds above £6,000.
For example, one of our clients sold a ring for £9,000 that
originally cost £500 (ignoring any sale commission). Without
marginal relief the gain would be £8,500. With the benefit of
marginal relief, (being 5/3rds of the difference between £9,000 and
the £6,000 exemption threshold), the gain was restricted to a far
more palatable £5,000.
The chattels rule does not allow you
to divide a set into separate components. Thus you could not divide
a silver tea set into individual exempt sales of £6,000 to take
advantage of this relief.
decorations
A gain, which accrues on the disposal of a decoration for valour
or gallantry, is exempt from CGT. The only exemption to this rule
is if the decoration is acquired by the individual disposing of the
asset for money or monies’ worth.
wasting assets
These have been attracting particular interest recently in
auction houses. The reason being is that a gain on a ‘wasting
asset’ is entirely exempt from CGT. To be recognised as a wasting
asset, the item must have a predicted life span of fewer than 50
years or be regarded as ‘machinery’. Items falling within the first
category could include a valuable collection of vintage wine, which
is regarded as undrinkable beyond 50 years. Items within the second
category include vintage cars, antique clocks and watches, certain
toys and guns.
conclusion
The rules relating to IHT and CGT on
the disposal of chattels are complicated and advice should be taken
prior to any proposed gift or intended sale to mitigate the tax
payable.
Where valuable works of art and
chattels are comprised in a person’s estate we can, with the
assistance of an appropriately qualified valuer, obtain values and
negotiate with the Revenue to get the best results.
