Fiona Graham, a partner in the private client and tax team at Boodle Hatfield, discusses the complexities of the tax treatment of artworks held by resident non-domiciliaries.

Fiona Graham, a partner in the private client and tax team at Boodle Hatfield, discusses the complexities of the tax treatment of artworks held by resident non-domiciliaries.

The government appears to have a love-hate relationship with wealthy individuals and their families living in the UK, but resident elsewhere – resident non-domiciliaries, or the so-called non-doms.  The UK enjoys the wealth they bring and inject into the economy, but struggles with how such individuals should be taxed.

Nowhere is this more apparent than when it involves works of art held by resident non-domiciliaries (RNDs).  The rules on purchasing and selling and bringing works of art in and out of country for repair, sale or display are complex.

It is perfectly understandable that once an individual has a house in the UK they will want to decorate and furnish it.  Some furnishings may be quite valuable, and it is here that a number of issues arise.

If a chattel is brought to the UK to be enjoyed by that individual and purchased out of untaxed income a taxable remittance will arise.  The remittance is based upon the purchase price of the asset, and not its market value.

This can in some instances work in the resident non-dom’s favour.  Assets that were already owned at 11 March 2008, even if purchased out of untaxed relevant foreign income, will not be considered a remittance.  Equally, such assets bought after 12 March 2008 but which were in the UK on 5 April 2008 will not be treated as a remittance, even if subsequently taken out of the UK and brought back in.

Caution required

Care should therefore be taken when bringing existing works of art and other chattels into the UK to ensure that they were not purchased from untaxed relevant income which arose when the resident non-dom was already resident in the UK or, if they did, that it was sufficiently long ago that it does not matter.

Art institutions have lobbied hard to ensure that works of art brought into the country to be displayed at museums or for sale by a UK auction house should be excluded from the remittance basis.  Equally, items being brought into the country for a repair or for less than nine months also fall outside of the remittance rules.

A remittance may however be triggered if works of art are sold whilst the resident non-dom remains in the UK.  However, from April 2012 a remittance charge will only be triggered on the original income or gains used to purchase the asset if the proceeds are still retained in the UK broadly 45 days after the sale proceeds have been received.  A remittance charge can be avoided if the proceeds have been re-invested in a specific type of qualifying investment.

Furthermore and in response to consultation responses, where works of art and other chattels are sold in the UK, the resultant gain can be subject to the remittance basis (if appropriate) rather than being automatically subject to CGT.

Both these changes are designed to encourage sales of assets by UK auction houses in particular.

Further amendments to come?

The government is believed to be looking further at the exemptions to the remittance rules and it is possible more changes will come in 2013, particularly addressing how the remittance rules should work when assets are destroyed or lost.

Unsurprisingly, donations to the nation are given favourable tax treatment.  A taxable remittance will not occur if a pre-eminent work of art or object purchased out of untaxed relevant foreign income or gains is given to the nation.

Obviously, a taxable remittance is made if a resident non-dom purchases new chattels whilst in the UK out of untaxed foreign income and gains.  There are some exceptions for property worth less than £1,000 ($1,560) and for certain items brought in for personal use such as clothing, footwear, jewellery or watches.