By John A Sibbald, Pall Mall Art Advisors
Looks at the importance of professional advice in connection with the acquisition, ownership, and disposal of art and other valuable chattels by sale, gift or estate tax planning.
The Art Market
Two things are certain about the art market. The first is that art buyers and collectors are increasingly acquiring art and collectibles from an investment viewpoint.
The second is the increasingly heard complaint that the art market is not properly regulated, leading to a lack of transparency and access to authoritative sources of advice.
Art Buyers and Collectors
The 2015 TEFAF European Art Fair Report, considered to be the authority on auctions, art fairs, and market trends, recorded the highest ever total value for sales in the art market in 2014. It reckoned the global art market totalled more than €51 billion ($53.9 billion U.S.), surpassing the annual sales figure for the 2007 pre-recession high of €48 billion ($51 billion).
The Report noted that the most popular acquisition in 2014 of the High Net Worth Individual was jewellery, gems and watches (29%), while antiques and collectibles ranked second (21%) with art representing 17% of sales.
While the global art market contracted in 2015, reports are indicating a strong recovery at the start of 2016. The increasing wealth allocation to art and collectibles is supported by the recently published Knight Frank 10th Wealth Report and the Deloitte & ArtTactic Art & Finance Report 2016, with the latter finding investment value as an increasingly important motivation among art collectors (47% of those approached in 2014 rising to 64% in 2016).
The Deloitte & ArtTactic Report believes there is plenty of evidence to conclude that:
“There is every indication that art and collectibles will continue to play and important part in the portfolios of the wealth in the years to come.”
There are real concerns about some aspects of the way the art market operates. The recent publication of the so-called Panama Papers has already focused attention on some art related operations, but to suggest that the art market is unregulated is wide of the mark.
The British art market, which accounts for 22% of the global market, is highly regulated, both at an EU and national level. As at February 2015, it was estimated that there were 167 applicable laws and regulations affecting the market, including the Artist’s Resale Right Regulations, the Dealing in Cultural Objects (Offences) Act, regulations under the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), and the Auctions (Bidding Agreements) Act, to name but a few.
However, there are a number of significant issues that are specific to the art market, which still require addressing:
• no industry regulator
• conflicts of interest giving rise to confusion over commission charges
• lack of transparency over true ownership which can create title issues
• distortion of competition which can arise from auction house guarantees or similar activities and which can amount to insider dealing
• third party valuation and appraisal is not regulated in the UK and many other countries
Other related issues are money laundering, tax evasion, corruption and fraud. As the Deloite/ArtTactic Art& Finance Report 2016 puts it “There is strong awareness and agreement on what the problems are, what is less obvious is how best to address these on a coherent and coordinated manner.”
Improvements could be made by more effective enforcement of existing regulations, particularly in the areas of competition and criminal law. An important contribution too can be made by the purchaser, who is always better advised to deal with members of appropriate professional organisations and to seek independent advice.
The same caveat should apply when seeking professional valuation or sales advice. Advice by an independent third party professional adviser can provide both assurances as well as help achieve the most satisfactory financial outcome. While membership of a professional body is not an absolute guarantee of competence and honesty, it goes some way to establish credentials and may be helpful if something goes wrong.
The role of the lawyer
In the context of owning, acquiring or disposing of art, there are three areas where a lawyer may be required to contribute
Regulation of general application
The first is the purchase or sale of a work of art (or jewellery, cars, guns, antique furniture), is subject to the usual range of property transaction legislation, such as those regulating the sale of goods, consumer contract, trade description, intellectual property, etc.
While the advent of online sales brings a raft of regulation, most art sales are still “handshake deals.” Those advising clients should advise them to seek a more rigid approach to transactions on the basis of written agreement. There could be a number of circumstances where it would be advisable for a lawyer to draft or review any contractual arrangements prior to purchase or disposal. It may also be advisable to have other ownership arrangement checked, such as contracts for transport, insurance or agreements for loans to museums or exhibitions.
Art specific regulation
Secondly, there is a range of art-specific legislation where legal advice would be highly advisable. Examples of this are the already mentioned CITES regulations to prevent international trade from threatening species.
Appropriate exemption certificates may have to be obtained even when the purposes of transport are not for sale. There is a lot of uncertainty in the application of CITES regulations: for example, what amounts to the meaning of “unworked” horn or ivory”? Seeking legal advice may forestall trouble or seizure of valued items as happened to two teenage pipers returning from a competition in Canada. Should the pipers wish to attend similar events outside the US, the new US legislation requires the owners to obtain a CITES certificate to take the pipes across the border via one of the thirty eight designated ports.
When art and antiques are bought and sold above certain the value thresholds, it is necessary to obtain licences to export these items from the UK. Different limits apply depending on whether the destination is within or outside the European Union.
Another trap for the uninitiated and where legal guidance may be important is in connection with the Artist’s Resale Right known as ‘Droit de Suite’.
‘Droit de Suite’ is a royalty payable to a qualifying artist or the artist’s heirs each time a work is re-sold during the artist’s lifetime and for a period up to 70 years following the artist’s death, sellers need to be aware of this and should seek legal advice if it is an issue. £50 million has been collected in the UK alone since its introduction in 2006.
A new British copyright law comes into effect in 2020, which will restrict design rights on mass-produced items to 25 years. This may threaten the viability of museums, publishers and art-related businesses to work with artists and estates on reproduction rights.
It also raises concerns when an artist or designer uses work or ideas from another artist or designer as inspiration for a new work, which happens frequently in creative industries. Try imagining the Rolling Stones without the influence of James Brown or Jeff Koons without Andy Warhol.
Where this kind of approach may be heading is illustrated by the removal from Sotheby’s Contemporary Art Sale in February of a painting by a painting by Elizabeth Peyton of the punk singer John Lydon following a claim by the Sex Pistols photographer Dennis Morris that the painting infringed his copyrighted photography of Lydon.
The changes are retroactive: meaning in some cases where image rights have expired they .will be revived and the new legislation will make copyright breach a criminal, rather than a civil offence.
Tax related aspects
Artwork has become an increasingly important aspect of estate planning and administration because it can affect an estate’s overall value, resulting in substantial estate or inheritance taxes.
The freeze of the Nil Rate Band has contributed to a significant rise in the total of IHT revenue for HMRC with rising house prices, asset prices and inflation, pushing more estates into IHT. Last year the Office for Budget Responsibility forecast that the number of Britons paying inheritance tax will almost double over the next five years.
Professional advice should be sought on various steps to reduce any unnecessary tax including:
• Potentially exempt transfers
• Lifetime gifts
• Gifts with reservation of benefit
• Chattel Rental Schemes
• Acceptance in lieu of IHT
• The Cultural Gifts Scheme
• Private treaty sales of a heritage item to a national museum or gallery.
Trusts, or alternatives such as a family investment company or family general partnership, often play an important part in preserving chattels from generation to generation and clearly the setting up of such an arrangement is the province of the lawyer and accountant. Again continuing legal advice during the lifetime of the trust will be important.
The role of the valuer
Being aware of the correct and current values of art, jewellery and other valuable objects is of critical importance.
To meet the required criteria, a specialist valuer will be essential in setting out the arguments for the transfer of an object under an acceptance in lieu arrangement, the Cultural Gift Scheme or through sale by private treaty.
The valuer’s knowledge of market values will assist the wealth manager, lawyer or accountant in guiding trustees over assessing tax liabilities or on the disposal of assets for diversification purposes or raising income to meet anticipated tax liabilities.
Advice from an experienced, established and independent valuation business can offer confidence in the acquisition of new works or the sale of items.
Such assistance could also include negotiating auction house or gallery commission rates or arranging sale by private treaty.
Valuation and art advice services are the “glue” that connects the professional advice offered by lawyers, accountants, and wealth managers and the art professionals.
John Sibbald is a member of Pall Mall Art Advisors’ Business Development Team and a Book and Manuscript specialist.