The recent news that two high-value private art collections – the Macklowe and Donald Marron collections – which include rare works by Warhol, Picasso, Rothko and many other well-known artists are to be sold brings into focus issues of ownership and taxation of art collections, write Robert Gibson and Camille Tassi, of law firm Taylor Wessing.
Camille Tassi is a senior associate in the Private Client group. She advises on a wide range of private client issues, including wills, powers of attorney and the drafting and administration of trusts.
Robert Gibson is a senior associate within the Private Client group specialising in contentious trusts work. Rob advises on all aspects of contentious trusts work with a particular focus on advising and representing trustees and high net worth individuals on a range of trust issues in litigation both in England & Wales and in offshore jurisdictions.
The Macklowe collection’s 65 most-valuable works have an estimated value of $700m. These are being sold as a result of a court order, following the divorce of Harry and Linda Macklowe. In New York, the Supreme Court ruled in 2018 that the former couple must dispose of most of their art collection, “the parties’ most valuable property”, and split the proceeds.
Donald Marron, a now-deceased American financier, built an art collection valued at $450m which is now being sold by his estate. Marron’s will stipulated that his collection could be sold “at public or private sale”. It is now being sold through three major galleries – Pace, Acquavella and Gagosian, rather than at auction.
The sales throw up interesting issues of ownership of art, particularly shared ownership as between spouses, both in life and death. Here, the law in England does not necessarily follow the path one might expect.
Disputes as to the legal title in pieces of artwork are common. Unlike real estate, there is no central system which records the ownership of art, and this can make it very difficult to verify the true owner of an artwork. The possession of a piece of art does not necessarily equate to legal and beneficial ownership, particularly as sellers typically consign their works to art dealers and buyers interact only with those dealers.
The opaque nature of art ownership increases the risks that the seller may be withholding information, which could raise problems in the future. It becomes very important that, when purchasing artwork, individuals conduct proper due diligence prior to concluding any transaction. This could be to ensure that the seller does, in fact, own the work in question, that the buyer is obtaining an unencumbered title and that the artwork is of the provenance and of the value that the buyer believes it to be.
However, consideration is rarely given to the idea of holding art jointly, particularly the intention of the purchasing party and whether the art is intended to be jointly owned or gifted in some form or another.
Who owns the art?
Typically, legal title in the art vests in the person contracting with the seller on delivery of the art. However, this does not apply where a purchaser is acting as agent (i.e. an art dealer buying on behalf of someone else). This would normally be the case even if the assets were purchased from a joint account.
Who gets what?
Due to this principle, it will be necessary for a spouse to establish that there was a gift of the art (or part of the art) to them if they were to claim an interest in the art legally. There has been a good deal of complex cases on the issue. A 1988 Law Commission working paper on Matrimonial Property came to the following conclusion: “Even when a married couple have thought about it and wish their property to be co-owned, creating co-ownership may present difficulties. In what we suspect is the more usual case, where the couple have not thought about it at all, but if asked would say that they assumed much of their property was co-owned, they would be wrong.”
So, when does this become important? The issue comes to the fore in circumstances where a party comes to sell a piece of art to which another party claims a right. Alternatively, we have seen circumstances where the ‘owner’ of a piece of art has died, leaving the art collection to a third party (not the spouse). There has then been a claim that the ‘owner’ had no right to give away the art upon death because it was owned jointly.
In the absence of any express written agreement, or evidence of the gift, the law in England is against the party claiming to have some share of the art. This is a hard test to meet. Not only must you prove intention, but you must also prove that there has been delivery of the art to the person claiming a share. ‘Delivery’ can mean one of physical delivery or of constructive (non-physical) delivery.
Delivery is difficult to prove, especially in the context of husband and wife who are living together. An essential requirement of physical delivery for example is that it must unequivocally suggest that the donor intends to part in possession of the item. In fact, it is not even certain whether it is possible to affect a transfer of a half share in a piece of art by physical or constructive delivery.
It is designed to prevent bankrupts from easily gifting property (or later claiming it was gifted) to keep it out of reach of creditors in an insolvency situation.
Death and taxes
As with any passion investment, there are always the less exciting considerations, and tax falls squarely within that category. Here are some tax implications of owning art in the UK:
During a work’s lifetime, the tax position for buying, owning and selling art is much the same as owning other assets. There are always VAT and customs duty considerations depending on the origin of the works.
In the absence of a wealth tax in the UK, there are no specific tax consequences of simply owning works of art. And, when it comes to giving up a beloved piece or realising an investment, capital gains tax (CGT) will be charged on any gain realised on a sale, gift or other disposal in the usual way at usual rates. The only relief one can expect over and above an individual’s usual Capital Gains Tax annual exemption is where the proceeds do not exceed £6,000.
What about on death? Take the Marron collection as an example – what would a similar position look like in the UK from an Inheritance Tax (IHT) perspective? Are there any ways in which the 40% UK IHT liability (at current rates) on a valuable collection can be reduced? Many works of art in the UK have been held by the same families for generations and the UK tax legislation does have some beneficial rules to reduce liability to IHT, where it is in the interests of the nation.
The first example is the Conditional Exemption. This broadly provides for a (potentially indefinite) deferral of IHT, where the recipient of artworks qualifying as a ‘heritage asset’ undertakes to keep the work permanently in the UK, ensure it is adequately preserved and secure reasonable public access.
Secondly, there is the Acceptance in Lieu scheme. This allows the executors of an estate to transfer ‘pre-eminent’’ works of art or other heritage assets to a museum or otherwise into public ownership and, in doing so, to offset an IHT liability.
Tricky conversations are worth having
As difficult as it may be to have these conversations in the matrimonial home, lawyers suggest drawing up a formal contract on how a piece of art is to be owned and in what share. This will prevent disputes later down the line, even after death.
When working out who is to own a piece of art taxation should, as ever, always be considered, particularly for international individuals who may have choices to make as to where and how their collections should be held.