Today, UK private investors are increasingly attracted to alternative assets such as fine art and antiques, instead of traditional investmen...

Today, UK private investors are increasingly attracted to alternative assets such as fine art and antiques, instead of traditional investments in stocks and shares. This can be a good investment choice, and enjoyable for collectors; however, few people consider the tax and VAT implications. Anyone investing in art should consider the potential tax liability on their investment. For example, there could be tax consequences if the item is sold, given away or left in an estate upon death, and savvy investors should familiarise themselves with the tax rules before making their investment. 10 Tax Issues for Private Art Investors 1 If I buy an item, do I have to report anything to HM Revenue and Customs? You do not have to report anything to the Revenue, but do remember to keep a note of all the purchase costs for future reference. According to Customs, if you are VAT registered, you must report the purchase to them. You have to decide whether you are going to treat the asset as a business asset or as a private asset held outside the VAT system, and write to Customs to tell them. 2 Can I claim income tax relief for maintenance expenses? Can I reclaim VAT? There is no income tax relief for maintenance expenditure unless you actually use the item in a business where permissible deduction, relevant to such business use, may be available. Where you have no income tax relief, consider carefully if the expenditure may actually be restoration, in which case retain details of the costs against possible future relief from Capital Gains Tax. You can reclaim VAT on maintenance expenses, if and to the extent that it is used for a business purpose (e.g. on display in a house open to the public), whether it is a business asset or not. Can I claim tax or VAT relief for insurance premiums? Generally, the same principle applies as for maintenance expenditure, with no income tax relief unless the item is used in a business. It is common to incur insurance costs with sales at auction and those costs are deductible, as incidental costs of sale, to provide relief from CGT. You cannot claim VAT relief as no VAT is charged on insurance premiums. Insurance Premium Tax is better than VAT because the taxpayer gets no VAT deduction. 4 If I get no relief for insurance, am I not taxable on insurance receipts for loss or damage? You are exposed to tax on the receipt. The insurance proceeds are technically liable to CGT as if the item had been sold or, if only damaged, then as if only part of it had been sold. But, if the proceeds are used to restore or replace the asset, you can make a claim which reduces the capital gain, if any, to the amount not spent. 5 What tax and VAT do I have to pay if I sell? CGT may be chargeable on the capital gain normally computed as the difference between net sale proceeds and total costs of acquisition. No gain is charged unless the proceeds (before sale costs) exceed £6,000 and, if they do, the gain cannot exceed five-thirds of the excess. Special rules apply if the item had formed part of a set. You can, however, reduce the gain by taper relief, which varies by reference to the time you had owned the asset. VAT is chargeable in principle if and to the extent that you have treated the item as a business asset. However, you may be able to treat it as a second-hand item, or as exempt, or as zero-rated depending on the facts. 6 What if it is stolen, lost or damaged and it was not insured? You might have a loss to claim for offset against other capital gains. This is computed under rules similar to those described above but effectively excluding the first £6,000 of loss per item. VAT may be due, to the extent that you have treated it as a business asset, unless you are able to produce evidence of the theft or loss. 7 What if I give it away? A gift is a disposal for CGT purposes and is treated just like a sale, as above, but with market value of the asset put into the calculations where the sale proceeds would have gone. Some gifts (mainly into trust) may carry a right to hold over the capital gain and, for important works of art, perhaps an obligation to permit public access. In such a case, the donee will inherit an acquisition value of the market value reduced by the gain held over. Expert advice should normally be sought in complex matters. If it was a business asset on which VAT had been deducted, there is likely to be a VAT charge. 8 What if an item is owned jointly by me and my spouse/civil partner? Whilst there is therefore no basic difference to the positions above, the limits stated apply for each part-owner. Husband and wife joint owners need not worry about CGT on a non-set item sold for less than £12,000 of gross proceeds. The VAT principles remain the same. 9 What happens to items I own when I die? All your assets need to be brought into account for Inheritance Tax by your executor(s) with the tax paid accordingly. If you bought a work of art more than six years before your death then it may be possible for your estate to avoid IHT at that time by claiming conditional exemption. This is very complicated, with obligations, and your heirs should seek comprehensive advice. Whoever inherits the item will be treated as acquiring it at the date of your death and for its market value. They can then turn to question 2 above. Normal VAT rules apply to any assets that were treated by you as business assets. There may be a transfer of a business (no supply of business assets), or a disposal (possible VAT charge). 10 If I gift private chattels to my son (who is VAT registered) and lease them back for a market rent, will I have to pay VAT on the leasing charge? Yes, probably. Furthermore, you won’t be able to reclaim it unless you use the chattels in a taxable business.