UK Law and Practice Contributed by: Margherita Barbagallo, Sanskriti Mohta and Nilojana Nirmalan, Dragon Argent
10.4 Artworks Exempt from Inheritance/ Donation Taxes Artworks are not automatically “excluded” from these taxes, but certain transfers are exempt, and specific schemes allow for tax to be settled using the artworks themselves. Spousal Exemption The most common exemption is for gifts and inherit - ances between spouses or civil partners, which are free from IHT, regardless of the artwork’s value. Charitable Donations Gifting an artwork to a registered UK charity is exempt from IHT and CGT. Furthermore, leaving 10% of your net estate to charity in your will reduce the IHT rate on the rest of your estate from 40% to 36%. The Cul - tural Gifts Scheme incentivises lifetime donations of pre-eminent works to the nation by offering a 30% tax reduction against income or CGT. Conditional Exemption This is not an exclusion but a deferral. If an artwork is “pre-eminent” (of national, scientific, historic or artistic interest), the owner can apply for it to be conditionally exempt from IHT. In return, they must agree to main - tain the object and ensure reasonable public access (eg, at least 28 days per year or by appointment for archives). This exemption can apply on death or a lifetime transfer AIL This is not an exclusion but a form of payment. It allows IHT to be paid by transferring a “pre-eminent” artwork to the nation. The estate receives a tax credit for the full value of the item, plus a 25% douceur on the IHT portion, making it financially beneficial. De Minimis Exemptions Individual objects valued at GBP6,000 or less are exempt from CGT on disposal, and “wasting assets” (such as clocks and watches) are also CGT-exempt. 10.5 Trusts Artworks can be placed in a trust, and this is a com - mon strategy for art collection succession planning. The legal owner(s) of the artwork (the settlor) transfers the legal title to a group of trustees, who then hold the
bill, often with a 25% douceur (sweetener). If the estate leaves 10% of its net value to charity, the IHT rate on the remainder reduces from 40% to 36%. Executors must also consider that beneficiaries who later sell will have a CGT base cost equal to the probate value at the date of death. 10.3 Tax Implications of Artwork Gifts and Donations The tax implications differ depending on whether the gift is made during the donor’s lifetime or on death, and on the relationship between the donor and recipi - ent. The Recipient Generally, the recipient of a lifetime gift does not pay IHT or income tax on the gift. The liability falls on the donor’s estate if they die within seven years of making the gift, with taper relief applying after three years. If the recipient later sells the artwork, their CGT liability is calculated based on the original donor’s base cost, not the value at the time of the gift. This can mean a large tax bill if the artwork has appreciated signifi - cantly over a long period. Certain exemptions exist for “wasting assets”. The Donor Lifetime gifts are potentially exempt transfers (PETs). They become fully exempt if the donor lives for seven years after making the gift. Gifts to trusts may attract an immediate 20% IHT charge on values above the nil-rate band. A gift of an artwork is treated as a disposal for CGT purposes. The donor is deemed to have sold it at its current market value, which can trigger a CGT charge (at up to 20% for most assets) even though no cash changed hands. This is a significant consideration and a potential cash flow problem. The donor’s annual CGT allowance can be used to mitigate this. If a gift and leaseback arrangement is used, the rent paid by the donor to the recipient (eg, their children) will be taxable income in the recipient’s hands.
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