An effect of the recession that hit the US in 2007 was that as other assets foundered, a growing number of investors considered turning to visual art. Diana Wierbicki, a US-based art specialist for law firm Withers Worldwide, says that as the appetite for art increases, the art world should anticipate an increased focus on the rules and regulations surrounding the buying and selling of art.
“With the art world getting more attention, it will be interesting to see the role that the government starts to take in trying to make it more regulated and more of a transparent market than it has traditionally been,” she says.
One area where she perceives a particular need for transparency is commissions. In both the US and Europe many dealers protect their relationship by keeping their buyers and their sellers undisclosed. This can make it hard to ascertain what commissions are being taken and by whom.
“When you look at a lot of contracts you’ll often see a net price but the dealers are not disclosing how much of a commission they are receiving. This is something to be cautious of,” she says. “There are anti-money laundering laws that you have to be aware of when you are moving money globally.”
Even when buying from respected institutions like Christie’s and Sotheby’s it is advisable to ask plenty of questions, she adds.
“Our clients often have trusting relationships with the business side of Christie’s and Sotheby’s and so when they receive the contract they sign off on it without having anybody else look at the small print.
“A big part of my job is to represent those clients and make them aware that Christie’s and Sotheby’s have in-house legal teams. They’re evaluating risk on their end so you should also have somebody taking a look at those contracts from your perspective as an art investor as well.”
She adds that when selling art, it is more important than ever to carry out your due diligence and to structure the transaction so that there are no nasty tax-related surprises.
“In the US you are hit with a higher capital gains tax on art than you are on other investment, so it’s at a 28% federal rate plus you may be subject to a 3.8% Medicare tax on different types of investment, and then you may also be hit with a state tax – so you could potentially face a tax hit of 40% or more when you are selling art,” she says.
When buying internationally it is also important to consider transport restrictions on certain materials such as ivory – and the issue of forgery is a growing concern. Wierbicki’s overall message is that whether buying or selling, it is increasingly important to be circumspect.
“This used to be a handshake industry but the values have gone up so much in the art market that that won’t work anymore,” she says. “It really is its own asset class. We’re seeing art sales in the millions and it’s becoming more regulated. We have to be much more cautious about the kind of information that we have – so doing the due diligence now is very important.”