Art management has a life path that may come to surprise some collectors. How, should we reorganise collections and shape it, and when is the right time to deal with the related questions?
Everything has, a beginning, so too the art collection. Beginning with a first work, acquired with passion, and then additions to be made further.
ART MANAGEMENT CHECKLIST
- In the case of purchases via the art trade, VAT accounted for 20% in UK, while the tax rate in Switzerland was generally 8%.
- It can be more tax-advantageous for art collectors to act as commercial traders rather than private collectors (keyword: profit and loss account).
- Tax depreciation (AfA) on art is only possible up to a purchase price of €5,000; in the case of purchase prices, the financial administration assumes value or value growth.
- Gifting and inheritance of art can be tax-exempt at 100% or at least 60% under certain conditions.
- An art foundation should be well thought-out, since the personal and financial obligations are substantial in the long run: not only for the collecting collector, but also for the offspring.
- An art insurance is to be considered for risk cover during hanging, storage, exhibition, loan and transport.
The way the collection is handled differs from each phase of the collector’s lifetime.
A growing art collection, in both size and monetary value, naturally increases the art management responsibility for the collector. This theme does not only concern collectors of a higher age who need to consider the issue of inheritance.
Even younger collectors are well advised to take particularly care of how they manage their artworks.
It is never too early for collectors to think about the art management of their collection. Only the way the collection is handled differs from each phase of the collector’s lifetime.
BUY AND SELL ART
The activity of art management is to buy and partly sell individual works for the care and reorganization of their collection - whether because the taste changes, or the quality demands grow.
Since the beginning of 2014 the full value-added tax of currently 20% percent has been valid for the purchase through art dealers and galleries in United Kingdom.
The full value added tax has to be paid for the entire purchase price of the work of art.
The full tax rate is also valid for art sales in Switzerland, but this is currently only 8%.
COLLECTOR OR DEALER?
In addition, there are also collectors, who - consciously, sometimes unconsciously - focus their art management style on a specific art topic.
The time may come to sell or want to sell them as a whole. In both constellations, the question arises whether the resulting gains or losses could be taken into account for tax reasons.
The key point is whether it is a non-taxable private sale business or tax-relevant income from a business enterprise.
So should you classify yourself as an art collector or an art dealer?
In terms of pure administration of your artistic assets, if you had no sales, or very rare sales, taxation does not arise: especially if you do not make any profits.
It is only with regular activity in the art markets with the goal of realizing profits, whether as a seller or an intermediary, that such a tax liability is imposed.
A speculative tax generally applies when the newly acquired works of art are kept by the collector for less than a year - but not for inheritances and donations. Here, the date of acquisition of the donor is valid.
Art management can also be a be a good way to reduce your own tax burden.
Please note: If there is less than one year between the purchase and sale of an artwork, the speculative gain - the difference between the purchase price and the selling price - is to be taxed according to the personal tax rate.
However, if a work of art is sold at a loss, this can be claimed for tax purposes. Such an offsetting is generally only made with profits from other private sales transactions - this may include real estate sales.
If art objects are regularly traded, this could be advantageous for collectors.
This is when the collector can take account of these gains and losses as so-called income from their art management business (art dealer) operations.
The acceptance of a commercial operation by the financial administration is associated with the fact that losses in sales can be claimed as tax reduction.
Since this is also true regarding the depreciation of artists who are still unknown with sales prices below €5,000, a business set up may be an attractive option for some collectors.
Compared to losses from private sales transactions, commercial operations are separate from the equalization or deductions with other sources of income.
However, it should be considered that the art collector, who behaves like a dealer, can be an entrepreneur in the sense of the VAT law and has to show the value-added tax accordingly. In turn, he can, of course, also claim this as input tax.
Art management does not only contribute to personal enrichment and nor is it an investment, but it can also be a good way to reduce your own tax burden. This is especially true of gifting and inheritance.
GIFT AND INHERITANCE
In answering this question one carries a special responsibility before him as a collector, the collection as a whole and for one's own family. Thus, even in some cases, art can be transferred at a 100% tax-free rate.
Example: during his or her lifetime, a collector is holding their fortune or part of it in art and arranging a loan with a museum.
The heirs oblige the collector not to make money on the works before the end of a ten year period. If the said collector lives another 20 years there is total tax exemption in case of inheritance.
If, however, the works of art are sold by the heirs before this deadline, the taxable amount is 40% of the monetary value. But also this is quite favorable.
There are many family assets that have been legally saved from the inheritance tax.
This tax advantage benefits not only inheritance; it is possible to donate money to children or to third parties much earlier in life - even if the works have not yet gained 20 years within family possession.
At the same time, art objects are valued at high price discounts, so a transfer of wealth would also be possible on a larger scale.
The reason for this is that the financial authorities are fundamentally obliged to make a cautious estimate of the value of the products, in order to start selling all works on the tax day, inheritance or donation.
The consequences of such a sale which is set on a fixed date would have a strong influence on the prices. In addition there are art-historical parameters such as quality, subject, and market freshness which also have an effect on price-fixing.
All of this leads to discounts that can amount to 50-80%. The larger the collection, the more extreme the possible price drops.
To use this possibility, the financial authorities require a recorded list of the works with value and date of purchase.
In order to find this value, you have to be careful, with discounts of up to 80% possible. And the collection must be in the public interest or at least accessible to the public at times.
A permanent loan to a museum would have met both criteria.
THE ART FOUNDATION = VALUABLE OR MEANINGLESS?
What should you do if your children are not interested in art? Or what if you have none?
Well, one could place the works with their own private museum, partner with an existing institution, create their own foundation or to be used as a loan, permanently or temporarily.
Basically, the topic of art foundations is always polarizing, whether it is a collector, an artist or an inheritance.
The art management of a foundation always leads to personal reasons. The foundation is actually like a child that comes to the family. Once she is there, she remains.
Also with a temporary foundation which lasts at least 10 years. And it has its own rights, which the founder can determine only conditionally, which is often forgotten.
Whether a foundation is always the right legal form to achieve desired objectives, the right instrument, is an issue that affects various types of collectors. It is often the execution of the collector’s wills that is a wise alternative.
The topic of art foundations is always polarizing, whether it is a collector, an artist or an inheritance.
In general, it takes time to deal with this construct, its possibilities and consequences.
This should be done in time, however long it takes. In this way, one can help shape the life of its foundation, its development, its difficulties, but also its successes and possibilities.
As a donor, you are legally easier to do so.
During their lifetime, one can still influence the content of the foundation statutes; one can live by them and, if necessary, partially change them.
After the death of the founder, the purpose of the foundation, which is regulated in the statutes, is always sacrosanct, but the rest of the regulations are also largely the same.
Only compulsory administrative provisions of the statutes and changes of the law could then be reworded, not more.
Surely, according to the law, there is also the possibility of a testamentary foundation. But their statutes are only on paper; all after regulations are theoretically thought through and coordinated with each other.
THE HEAVY HEART OF HEIRS
If the collector does not take care of these art management topics during his lifetime, it is usually a complicated process. In practice, numerous heirs can count the many problems associated with unmanaged inheritance.
The founder is no longer concerned with this, since the heirs can no longer adapt to the practical requirements. A foundation cannot be changed any more.
The donor is the donor to whom everything revolves. Added to this is the property which the foundation is placed.
In the case of artistic foundations, issues do not only consist of art. Without money, works cannot be entertained, the costs do not dispute. This is often forgotten.
In the case of starting a foundation, as in the case of a donation in his lifetime, the heirs would also claim a so-called partial compensation.
That is, a founder irrevocably gives property to a foundation that is then deprived of his heirs, which is part of their free will.
If, however, the founder dies ten years after the transfer of property, the heirs are entitled to a share of the property. Unless they dispense with this claim in writing, most of all at the foundation will go to the children.
If one wants to preserve the collection beyond its artwork confines, but to be used as a prize for young artists, the research of works and artists, or even the scientific development of certain restoration techniques can all be connected with the art foundation as a charitable purpose.
Be that as it may, the family should be involved in a project of such scope as much as possible. Only then has the foundation found its meaning, the cohesion of the collection, but also the space to develop flexibly.
This requires a sufficient foundation capital.
Depending on the importance of the foundation's abilities - art, archives, financial - corresponding experts should also be included in the foundation.
Whether as a board member, a member of a board of trustees, a board of trustees or only a consultancy contract, this must result from the foundation and its purpose itself.
The founder is free according, to the law, to regulate its formation as they wish. Therefore, a foundation needs only one property and one art management board. But of course this is not enough.
UNKNOWN ALTERNATIVE: ART INSTEAD OF TAX
Tax regulation is not known to many, although this offers plenty of discussion material.
In the case of a donation, and inheritance, it is possible to reconcile with the state, instead of paying the inheritance or gift tax, individual art works, whole art collections, but also scientific collections, libraries, manuscripts and archives.
The prerequisite for this is that the quality of the works must be very important from the point of view of art, history or science.
Since state funding is also available for the purchase of art the provision can only be granted an exception according to the government’s legal basis.
If this regulation is used, tax revenues are significantly reduced. For this, the state receives art, but this is not liquid and can be used to fulfill the cultural tasks of the state.
A life plan always requires risk protection, in the case of an art collection there is art insurance. It is, of course, up to each collector to decide how to assess the risk or even to hedge it. A careful consideration has to be made.
The examination of insurance protection and the risk assessment of a collection depend on many criteria.
Borrowing, transports to exhibitions, must be respected as well as the coverage of sales objects within the framework of commission contracts.
Also, the distribution of the collection to different residences and thus the risk examination of the collector must be examined not only in legal terms.
The decisive factors here are always the actual requirements arising from the life of the collector. Life choices decide the art management of the collection and its protection.
If a protection is to be agreed, several points must be observed.
It is important first of all to complete the policy in its own name, no matter whether someone else, for example a gallery or a museum, bears the costs.
In the event of a claim, the collector should clearly know his contract and thus his / her rights and not have to assert it by means of a third party against his / her policy, which they are not familiar of.
In addition, who knows whether the policy presented by a third party is worth the paper on which it is presented?
If the policyholder does not pay his premium within a certain period of time, not only does the provisional cover expire but the entire insurance cover expires without the insurance contract being returned by the insurance company.
The insurance sum must then always be agreed with the insurer at a fixed rate, not only as a value declared by the customer.
For only the fixed tax guarantees can there be the disbursement of the full amount in the event of damage. The declared value must only be proven in the event of a loss of doubt.
But the fixed tax is also dangerous: namely, when it substantially exceeds the actual value. However, deviations of 10-15% are still not considered to be significant.
To this extent, the same rules apply in the art insurance business as in other sectors in which fixed rates can be agreed.
The cost of art insurance is on average 0.2% of the insured value.
So it is crucial to the diligence and knowledge of the evaluating experts. In addition, such a value is to be regularly reviewed on the basis of the current market price development within the art markets.
In any case, sufficient time must be devoted to the evaluation of the collection. An expert opinion must usually be presented, but the insurers also assess themselves.
Necessary information, such as facility reports, securing measures, and determination of transports are added.
For reasons of confidentiality, the presentation of the insured pricing list should only be agreed upon with the insurer, and only in the event of a loss.
The cost of art insurance is on average 0.2% of the value - depending on the risk, but also on the position of the insurer and on the negotiating skill.
Helpful is the mediation of a broker.
Not only does the broker usually get better conditions with the insurer, but also the handling in the case of damage is usually more professional.
And do not combine it with your household insurance, the art insurance has its own separate meaning. And with the agreement of an individual deductible, these costs can be significantly reduced.
When one weighs the individual points in this section, it is important to consider that the collection leads a life of its own. This applies equally to the young art collector as well as to the active ones who has collected decades.
Sometimes the questions which arise in art management may be the same; on some occasions the answers can be completely different.
On the one hand, there are different priorities at different phases of life.
On the other hand, the external conditions can also be quite different in certain constellations.
Be that as it may, a collection is always something unique that you have to meet and it’s here you have to take care.