Despite initial fears that the art market would limp out of the global pandemic, the disruption it caused seemed to create new opportunities for the market.
Auction houses and galleries tuned into audiences which for whom on-line access and social media was already part of their day to day lives. The combination of stockpiled unspent income combined with greater accessibility to the market resulted in a post-pandemic “liquidity dump” with record sums being spent on digital art works and luxury goods by art collectors old and new.
However, following the record breaking few years, the current indication is that the art market has now “softened”. The Art Basel and UBS Survey of Global Collecting 2024 suggests that the current geo-political and economic environment (which is hardly surprising – what a year 2024 has been!) has resulted in a cautious art market and a decline of 4% in 2023.
So what impact will the Chancellor’s Autumn budget have on the art market in terms of the UK’s share of the market?
Capital Gains Tax (CGT)
The increase in CGT rates was not as drastic as predicted.
The basic rate has gone from 10% to 18% and the higher rate from 20% to 24%. This will have an immediate effect on disposals taking place on or after 30 October 2024 and will apply to everything other than “wasting assets” such as cars and watches which may see an unexpected rise in popularity as an investment asset. “Flipping” Art for a short-term profit is less appealing. This may stabilise the art market by reducing the volume of quick turn over sales in the coming years.
Felix Hale, Director, Tax, Heritage, and UK Museums at Sotheby’s comments that:
“I think we will only see the full effects of this [the budget] in the years to come. In advance of the budget, a number of owners took the precaution of making lifetime gifts of their collection before the expected rise in the rates of CGT… However, sales to qualifying UK museums that can benefit from a tax incentive will become more attractive to clients and I suspect we will see an uptick in these types of sales.”
Inheritance Tax (IHT)
Historically, art collections benefitted from inheritance tax exemptions and reductions, especially where the pieces were part of a family’s heritage or held in trust.
High net worth individuals (HNWIs) concerned about legacy planning for future generations will there get little comfort from the new budget. Nil rate bands have been frozen until 6 April 2030, meaning that those with art collections in excess of £325,000 will be taxed at 40% IHT. In addition, now most business assets and agricultural properties will be taxable at an effective rate of 20% IHT on their value in excess of £1,000,000. Arguably the rise in popularity of “branded residences” which blend accommodation with luxury branded assets and art and will now be caught by the new inheritance tax regime.
Felix also comments on the changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) as follows:
“The changes to APR and BPR are, unfortunately, likely to hit landed estate clients hard and some owners may need to look to sell works from their collection to help pay off their larger Inheritance Tax bills. I think we are likely to see UK owners making more use of the ‘Acceptance in Lieu’ scheme, where owners can offset their tax liability by effectively selling a work of art to the nation in exchange for a tax credit. We may also see more owners making use of ‘Conditional Exemption’ scheme, where owners effectively defer the tax on qualifying heritage objects and works of art in exchange for entering into undertakings with HMRC, the most important of which is to grant public access to their objects”
Helena Luckhurst, Private Client Partner, adds:
“As a result of the budget changes, the emphasis will switch to lifetime giving, rather than waiting until death to hand on assets to the next generation. At least there was no change to the seven year survival period after which gifts made to individuals are exempt from IHT. That is not to say that the seven year period might not be extended in future budgets, though.”
The abolishment of the remittance basis of taxation from the 6 April 2024 means that anybody moving to the UK will be subject to tax on all worldwide gains. This is inevitably going to affect the UK art market. HNWIs who relocate to the UK will become a “long term UK resident” after 10 years and their worldwide assets will be liable for IHT. The fail to increase the nil rate band does not seem like much of an incentive to counter the fact that all their wealth may be subject to 40% tax on death.
The Art Market Basel Report Indications were that 97% of collectors last year planned to purchase works of art over the next 12 months throughout 2025. Attracting HNWIs and ultra high net worth individuals (UHNWI)s for the long term may therefore prove challenging as ownership of art, wherever it was purchased or is held, will fall into the testator’s estate, so are we going to see a migration of UHNWI’s to friendlier tax regimes is going to be one to watch in 2025 and beyond.
These changes will also have an impact on people moving into and out of the jurisdiction. Antonia Torr, Head of the Immigration Team commented:
“We are seeing an increase in demand for the UK Global Talent visa. This visa allows some holders to apply for settlement after just 3 years in the UK, meaning that new arrivals can become a permanent resident of the UK before they hit the ‘four year’ tax residence point on their foreign income and gains.”
“We have also seen a significant increase in the appeal of the Global Talent visa to artists, fashion designers and film producers. The UK art scene has always been internationally recognised and respected but recent investment into art and culture has meant that more and more international artists are setting up shop in the UK.”
It is clear that the Budget will give those linked with the art market much to think about in months to come. Art Collectors will need to think carefully about how to manage the new opportunities and challenges facing their collections (and their living arrangements) in a tax efficient way.
Despite the doom and gloom, none of these changes should make any difference to those who are passionate about art and buy it because they love it, not as an investment, short or long term. Art is a passion asset.
