The Art of Acquisition

Acquiring art can often be an intimidating prospect for private clients, particularly for a first-time buyer. Even well-versed art collectors can sometimes find the process hard to navigate.

STEP members may find themselves in a position where they are asked by clients for guidance and it is important that in this scenario they can point their clients in the right direction.  

The key considerations to highlight to clients who are seeking to acquire art in the UK for personal use, either privately or by auction.

Before purchasing a work of art, it is important the client does their homework. Clients should be encouraged to research the artist and provenance of the work, investigate past sales, and try to see the artwork in person, even if the sale is online.

Buyers purchasing at auction should carefully review any auction catalogue, which provides important information on, for example, value added tax (VAT), Artist’s Resale Right (ARR), any export restrictions and the rate of 'buyer's premium' (more on this below).

Clients making acquisitions via a private sale should be advised to read the sale contract carefully (taking advice as necessary) to understand all the costs, logistics and other terms of the sale. Any paperwork associated with the purchase should be stored carefully for the purposes of a future sale and to assist with the payment and reporting of any tax arising on the purchase or future sale.

Clients should be aware that, in addition to the artwork's purchase price, the following costs may arise.

Buyer's premium

Auction houses will charge a 'buyer's premium' on the amount over and above the 'hammer price'.

UK VAT

Generally speaking, and with some exceptions, the purchase of artwork in the UK for personal use is subject to VAT at the standard rate of 20 per cent, even if the artwork is exported from the UK shortly afterwards. VAT should not apply if the seller is not subject to VAT.

Artworks are often sold via the 'margin scheme', where VAT on second-hand goods is assessed on the difference between the price the work was last sold for and the current sale price, instead of the entire sale price.

VAT, which is collected by the seller, is the buyer's responsibility, so clients should be advised to confirm the VAT liability. If a client is buying the artwork for personal and private use, they will be unlikely to be able to recover the VAT.

ARR

ARR provide a payment to living artists (or their heirs in the 70 years following their death) when one of their works is resold for over GBP1,000. The amount, which is typically charged to the buyer, is calculated on a sliding scale, and capped at GBP12,500.

Under current rules, if a client is UK tax resident, is (or has been) non-UK domiciled (i.e., broadly speaking, they do not intend to reside in the UK permanently) and has claimed the remittance basis of taxation, they should be wary of using untaxed foreign income and/or gains (FIGs) to acquire a piece of art situated in the UK (or to bring a work purchased with these funds to the UK, other than in certain limited circumstances e.g., for public display). Doing so will constitute a taxable remittance of those funds, even if the funds are not transferred directly to the seller’s UK bank account, resulting in a UK tax liability of up to 45% on the purchase price.

Ideally, a buyer in this position should use 'clean capital' for the purchase: any funds that will not be taxed in the UK, even if remitted. If a client needs to use FIGs to fund the acquisition, completion of the purchase (i.e., payment and delivery to the purchaser) should not occur until the art has been removed from the UK, with the seller retaining title to the artwork until that time. Payment should be made to the seller's non-UK bank account. The sale agreement should set out these conditions.

From 6 April 2025, the existing tax regime applicable to non-UK domiciled individuals will be replaced. Under the new regime:

• During the first four years of an individual's UK tax residence (and assuming the individual has not been UK resident in the ten years prior to this) they can claim to be taxed under a special regime whereby they are not subject to income tax or capital gains tax (CGT) on most types of FIGs, even if brought to the UK (the FIG Exception). Those who are already UK resident may be able to claim this regime for the remainder of their first four years of UK tax residence, provided they were non-UK resident in the ten UK tax years prior to becoming UK tax resident.
• Individuals who have been UK resident for more than four UK tax years will pay income tax and CGT on their worldwide income and gains. As such, remitting these funds (which have already suffered tax) for a purchase at this stage should not trigger any further income tax and/or CGT liability.
• Any untaxed FIGs that arose prior to 6 April 2025 to a UK resident previously claiming the remittance basis of taxation will continue to be taxed when brought into the UK. This includes remittances by those eligible for the FIG Exception. There will, however, be a limited window of three UK tax years (starting with the 2025/26 tax year) during which these individuals will be able to designate pre-6 April 2025 untaxed FIGs and pay reduced tax on these amounts (12 per cent in 2025/2026 and 2026/2027, and 15 per cent in 2027/2028). Where UK art purchases are anticipated, buyers may wish to take advantage of this opportunity to designate such funds, pay the 12 per cent / 15 per cent tax, and then use those funds to acquire UK artwork or to buy foreign artwork and bring it to the UK. Artwork previously acquired using untaxed FIGs can itself be designated, which means that once the relevant tax has been paid, the artwork can then be brought to the UK without further income tax / CGT to pay.

Clients should consider the artwork's future use to determine the most suitable purchaser, be it the client individually, a company, trust or other entity. Although the ownership structure can be changed, it is preferable to get the structure right from the outset to optimise tax efficiency and to implement any succession planning objectives.

If a client wishes to transfer artwork from the UK to another jurisdiction, they will need to comply with any applicable export reporting obligations and tax payments under UK rules, as well as any import payment or reporting obligations in the jurisdiction of entry. Similarly, clients bringing artwork into the UK may have an exposure to UK VAT.

Any artwork produced more than 50 years before the export date requires a UK export licence. Where a work has been in the UK for less than 50 years, the application is not routinely scrutinised to determine whether the work is a national treasure (see below) and export licenses are typically granted in five working days. Where artworks have been in the UK for over 50 years and are of a certain value, the application will be scrutinised and licences are typically granted in 28 working days.

A small number of works each year are referred to the Reviewing Committee on the Export of Works of Art (RCEWA), which may defer approval of an export licence if it finds that the artwork is:

• closely connected to UK history and national life;
• of outstanding aesthetic importance; or
• of outstanding significance for the study of some particular branch of art, learning or history (collectively, the Waverley Criteria).

The deferral period (technically two deferral periods typically of around three to four months each) is designed to give a UK purchaser, usually a UK museum or gallery, a chance to match the sale price (or an agreed value if no sale has taken place) and acquire the work of art. If no UK purchaser expresses an interest to purchase or fails to raise the necessary funds, the export licence is granted. Since 2021, owners are required to enter into a legally binding ‘option agreement’ with a UK purchaser if they express a serious intention to purchase during the deferral period; otherwise, the export licence will be refused at that point.

The system aims to strike a balance between enabling a thriving art market, where buyers can purchase with confidence, and protecting the UK national heritage. Clients should be made aware that if a work meets the Waverley Criteria, the export review process can take up to one year to complete.

If a client wishes to bring art into the UK, the import will generally be subject to a VAT charge of 5%. To benefit from this lower rate of VAT, the art will need to meet certain conditions and have the correct commodity code. Generally, no additional customs duty is charged on imports of mainstream categories of art, such as original oil paintings or pencil drawings.

Clients must comply with any exporting obligations in the jurisdiction from which the artwork is being imported.

It is strongly recommended that an artwork is properly insured from the moment it is taken off the wall and placed onto a new one, and that a specialist fine art shipper is used.

The authors are well aware that clients on the threshold of the purchase of a prized artwork can sometimes fail to pause and think through prosaic issues, such as VAT or terms and conditions. The advisor's first job then, is surely to prompt those clients to take a moment and, with professional help if necessary, consider the legal and tax aspects of their purchase.

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https://journal.step.org/step-journal-issue-6-2024/art-acquisition