Bestowing chattels

Following the success of the late Noel Coward as a playwright and musician (particularly for the song Mad Dogs and Englishmen), a recent art auction at Christies also confirmed his status as an artist.

The auction included many of Coward's own works, including The View from Firefly, as well as pieces from his personal art collection, including Fishing Village and Cornwall by Christopher Wood, all of which sold above estimates.

The auction raised £1.3m. It's an impressive figure for an amateur's collection, but obviously very small compared to Sotheby's auction in February which raised £186.44 million, with Monet's 1908 Le Grand Canal selling for £23.7m. It goes without saying then that in the investment arena, works of art continue to hold an important place.

So what should investors bear in mind as they trawl galleries and seaside shops for their next purchase?

Will it hold its value?

For those with an eye for it, the return on an investment in art can be extraordinary. Christopher Woods died tragically young, but for those lucky enough to have acquired some of his works, there is a buoyant market.

The works of Roy Lichtenstein, known to many as an iconic cartoonist and mural artist of the 20th century,
now sell for millions. The proud owners of an old master are unlikely to lose money on its sale.

Inheritance issues

Difficulties can arise with chattel collections on death. Ownership
between siblings is complicated, which may cause valuable items to be sold.
An item in a will which is sold before death triggers the doctrine of ademption, so the unfortunate intended beneficiary ends up with nothing.

Chattels often disappear shortly after death, leaving executors with the responsibility of retrieving assets forming part of an estate, or sorting out disputes between rival beneficiaries.

A well planned and up to date will or accompanying expression of wishes should always make proper provision for chattels and, how they should be divided. Tax is clearly a matter of concern, but works of art are eligible for preferential treatment.

Pre-eminent art

Works of pre-eminent standard qualify for conditional exemption from inheritance tax, which is the government's way of helping to preserve national heritage. The asset must be made available for open public access and the standard is now higher than was previously required.

Families may find that artwork which previously qualified for the conditional exemption, may not qualify when it is applied for again on the death of the current owner. Pre-eminent assets will also qualify for a douceur (sweetener) if sold to certain galleries and museums, rather than private collectors.

The institution pays the market rate for the item, minus the capital gains
tax that would have been payable on
a private sale, and the inheritance tax
that would have been payable on the previous conditionally exempt transfer
is also deducted.

25 per cent of the tax value (the douceur) is then added back onto the sum paid to the owner. The tax burden
is therefore shared between institution and owner.

Acceptance in lieu

Alternatively heirs of pre-eminent artwork can offer it to the government in lieu of the inheritance tax that would otherwise have been payable. HMRC has an annual budget of £30m for the acceptance of heritage property in lieu of tax.

For example in 2014, a collection of paintings, drawings and cards by Frank Auerbach was accepted in lieu of £16m of tax. Under the new Cultural Gifts scheme, a liability to income, capital gains tax, or corporation tax can also be met by a donation of artwork in lieu of such tax.

What do you think?

Ultimately, the best reason to buy a piece of art is that you like it, and would give it room in your house or on your walls. The chances are that if you like it, others will too.

Rosamond McDowell is a partner at Payne Hicks Beach 

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