The Art of Valuation

Where works of art and other cultural property are concerned, practitioners will come across different types of valuations.

When it comes to estate planning, advisors will always need a proper tax valuation to provide a solid basis for the planning they are to undertake.

Advisors should be clear as to what kind of valuation they need and should seek professional assistance at an early stage.

Underpinning every piece of tax planning in relation to works of art (whether taken in isolation or as part of a wider assessment of assets) is a valuation.

Typically, a valuation for tax purposes is in the context of a probate, for inheritance tax (IHT) purposes, but the same principles of valuation apply at all other times. The probate valuation is essentially a reactive exercise required for compliance purposes and the division of assets, whereas a valuation obtained for the purpose of strategic tax planning is proactive.

Clients and advisors often focus on strategies for reducing a tax burden and, indeed, there are many opportunities, such as through appropriate application of reliefs and exemptions. However, at least as important is to ensure that the valuation underpinning those strategies has been undertaken properly, that it will be robust in the face of His Majesty’s Revenue and Customs (HMRC) enquiries and that it will provide a proper basis for any division of family assets.

Art valuers can produce many different types of valuation for a range of purposes, but it is only a valuation produced for tax purposes that should be used for planning and tax compliance. Before looking in more detail at the requirements for a tax valuation and the key concept of ‘open market value’, it may be helpful to recap on other types of valuation that might be offered.

Typically, an auction house will produce a valuation that should more properly be described as a sale estimate. It will include two figures: a low estimate and a high estimate, which are intended to show the likely range within which it is expected a piece might sell. However, they should be approached with caution. Depending on the type of piece, estimates might be set at a level designed to encourage bidding (i.e., in the expectation that the piece might sell in excess of the high estimate). None of thisis wrong, provided that these valuations are not used as a basis from which to extrapolate a tax value.

These valuations will comprise a single figure and generally are set at a figure that represents the retail replacement costs of the item in question. Although that figure is usually extrapolated from a low-high valuation estimate, there can be significant variations depending on the category of object. For example, although a piece of furniture might have an insurance value at double the low estimate, the insurance value for a piece of jewellery is more likely to be a minimum of double the high estimate, reflecting the higher retail cost of replacement. So, while insurance valuations serve a useful purpose, it is not advisable to use them for other purposes, whether it be tax or family division.

The statutory basis of valuation for IHT purposes is found in s.160 of the Inheritance Tax Act 1984.

Key to this is the concept of ‘open market value’, that is, the price an item might achieve on the open market, at an auction sale. The fundamental principle is that one looks at what a seller would achieve, not what it costs the buyer to purchase.

This is important in the context of auction sale results; one needs to distinguish between the ‘hammer price’ (the price confirmed by the auctioneer when the hammer comes down) and the price actually paid by the buyer, which is referred to as the ‘premium inclusive price’.

A buyer’s premium (payable by the buyer to the auction house) can range from 20 to 30 per cent of the hammer price, plus applicable value added tax. However, for tax purposes, it is the hammer price that matters. So, in preparing the valuation, the experienced valuer will be looking at comparable evidence of hammer sale prices, ideally as close as possible to the date of the valuation.

A valuation in the context of a divorce in the England and Wales Family Division of the High Court follows the same methodology as a tax valuation. In this scenario, the valuation document may be submitted to a court to inform the division of assets. The valuation will list a single figure of value for each chattel at the open market value.

One challenge with valuing art is that there is rarely a precise comparable in terms of both subject matter and the date of the sale. A good valuer will marshal the comparable evidence that is available but also factor in things such as provenance, condition, quality and rarity. Single owner sales by celebrity owners provide a good illustration of the potential impact of provenance. At a Freddie Mercury sale in London in 2023, a moustache comb that had a sale estimate in the range GBP400–600 eventually sold for GBP152,400.

Armed with a valuation prepared in the correct way, advisors can, with confidence, use this as the building block to provide sound planning advice. It is also worth remembering that a properly catalogued valuation will not just provide a figure, it will also provide:

• a full description;
• a digital image;
• the location (very helpful in a large house); comments regarding condition and attribution;
• historical provenance; and
• exhibition history.

A professional valuation can then help to address the following:

• Ownerships between spouses and, in more complex cases, involving family trusts or companies.
• Recording location when chattels are not in the family home, e.g., in a bank or on loan to a museum.
• Identifying items:
• that are conditionally exempted from IHT or estate duty;
• that might qualify for conditional exemption in the future;
• that could be used as an offer in lieu of IHT; and with an open market value of GBP6,000 or less (the capital gains tax (CGT) small chattels exemption), which could be used for making lifetime gifts.
• Drawing a distinction between a family’s core collection (which they may want to keep intact) and the rest, in heritage situations.
• Providing an expert commentary on scope for restoration, conservation or further research into attribution, particularly in the context of ‘old master’ paintings.[1]
• Highlighting any potential restitution claims.

In many cases, the valuation prepared for probate might be the first time such a comprehensive valuation exercise has been carried out. When this has been produced, executors and advisors can ascertain the likely amount of IHT that may be due. In cases of an estate passing to a surviving spouse, IHT will usually not be a consideration and, as the law stands, the surviving spouse inherits the chattels with an uplifted base value for CGT purposes. Bear in mind that these values will not at this point be formally agreed with HMRC; they may be examined subsequently if, for example, lifetime gifts are made.

Where IHT is a consideration, there may be scope for an offer in lieu of IHT using the acceptance in lieu scheme. Sales may also be contemplated or a division of the chattels between the residuary beneficiaries may be required. If there are sales, then, depending on the length of time between the death and the date of sale, HMRC or the executors may seek to replace the probate value with the sale price. There is no statutory provision allowing for any automatic substitutions of value (as is the case with land and certain securities) and so the argument will depend on whether the market for the item in question has moved between the two dates.

Perhaps most challenging is where chattels are not sold but divided between beneficiaries. If a beneficiary went on to sell an item, even in the near future, it would be unlikely that the sale price would precisely match the date of death valuation (such are the inherent uncertainties of value). So, in these situations, it is especially important that any allocation is prepared carefully, using good supporting evidence and, of course, agreed to by all parties.

Where an estate owns a work of art that is particularly valuable in comparison to the other chattels, the fairest solution may be for that work to be sold or offered in lieu of tax for the benefit of the estate as a whole.

In summary, it is advisable to commission a professional valuation and always unwise to attempt to extrapolate values for tax purposes from insurance values or sale estimates. Ultimately, a professional valuation for tax purposes will give to firmer basis for tax planning and a smoother journey for all concerned.

[1] Old master paintings refer to any painting by a painter who worked in Europe before about 1800.

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https://journal.step.org/step-journal-issue-4-2024/art-valuation