For international art collectors there are tax pros and cons when it comes to buying and selling art.
To illustrate the point, we have chosen to compare two nations with quite different ways of taxing their citizens. As you read on, it might become clear that things are not so black and white. Indeed, the tax man is not just out to rake in, but actively encourages artists and collectors to do well. In the same token, the stereotypical collector is not just out to scheme but knows that tax evasion is equally futile and stupid.
Why look at this? Well, as a principle, art everywhere in the world is being taxed as any other commodity being exchanged. However, when you look at the fine print in the UK and Denmark, you notice profound differences to this principle. What’s more, over time, these differences will shape society by defining who owns art and what art is being collected. E.g. if we ignore that Museums and trusts are mega-collectors in both nations, then the real difference is that companies own more art in Denmark, and individual collectors own more art in the UK.
Notice: Whatever you take away with you from this page, please obtain ‘full’ up-to-date advice from a tax adviser.
Tax on art
When you sell art with no pedigree, provenance or intrinsic value, it can easily fly under the tax radar. It is a crime without a victim as long it is inventory you simply have to let go of on a carboot sale. But more serious art transactions have a record of you or one of your relatives having bought it. If the art has appreciated in value, which art has a propencity to do, then your act of selling is subject to income and/or capital gains tax.
Art and Capital Gains Tax
If you inherit an estate including a collection of art, please consider that there is an annual tax-free allowance known as the ‘Annual Exempt Amount’. In that regard you only pay Capital Gains Tax if your gains for the tax year exceed that amount. It goes without saying that unless you are really attached to some of this inherited art, the tax burden might hamper the fun; and you might then want to consider your options carefully.
Add to this, that you might be liable to pay inheritance tax, though that too is subject to a tax threshhold. If you want to limit the estate, you could consider donations or setting up a trust.
Tax relief on Philanthropic donations to the arts
If you have money which hurts in your tax pocket, acts of philanthropy to the arts may offer you tax relief; but maybe only for a limited period. In April 2012 The Government proposed restrictions on these options.
Art and Value Added Tax
Buying and selling art in the UK is subject to standard rate VAT both when you sell on or claim back. Much art is however sold without VAT, either because the person selling it is a private person excempt from charging VAT or for other reasons. For that HM Revenue & Customs issued a ‘VAT margin schemes for second-hand goods, art, antiques etc’ . It is a clever and fair arrangement where you only pay VAT on the profits by documenting the difference between the object when you bought it (without VAT), and the Net price you sold it for.
The characteristics of the British art market
The UK art market is big business and always has been a dominant player in Europe. In true but oversimplified terms, the UK has great internationally renowned artists, unrivalled art institutions such as the Tate, Royal College of Art, and many passionate and dedicated collectors such as Saatchi. There is much public and private funding floating about in art, and the taxation of art is relatively lenient compared to many other countries.
Art is classed as regular inventory, allowable expense, and refunded in corporation tax over time
Many companies in Denmark are patrons of the arts, and some years ago the Ministry of Culture could proudly present a new set of tax breaks to encourage patronage of the visual arts.
If you consider registering a company in Denmark, you can pretty much hang up the art on the wall, let it stay there for 1-3 years and let the taxman pay it for you. This is a crude simplification, of course, because there is a set of conditions to meet. They are outside the scope of this article, but contact us if you want to know more. E.g. there are upper ceilings on purchase value, and you must buy directly from an artist, and a host of other things to consider.
Plonk art in your office and have it paid for you
In effect Skat, the Danish HM Revenue & Customs, regards this wall decoration very much like a purchase of any other inventory – be it capital or not. Here is an example: a computer is worn down or obsolete in 2 years, so you get ½ of its purchase value back in corporation tax after the first year, and the other half the following year. It is a kind gesture which ensures that you can buy a new computer when the value of your computer equals zero.
It is the same thing with art, only that the computer is being sent to recycling, and you might want to buy the zero-value art for a nominal fee. You then bring it home to your private collection, in the know that you will have to pay tax the day that you sell the art. By doing so, you don’t escape tax. No you simply defer it to later date by using a legal scheme which is a win-win for all. The government receives its taxes, the artist can exist, and your company is great to visit.
VAT on Danish art
In Denmark art is subject to 25% VAT like any other good or service being sold. This is called ‘moms’ and is of course zero-rated when you reside in another country and import it from Denmark. The general condition to meet is that you also have to be VAT registered as a buyer, to benefit from the 0% reversal charge, and you must quote a valid VAT number to the seller abroad. If you are not VAT registered as an importer, and want to avoid paying VAT, there is another option.
Buy directly from the artist and not via a gallery or auction house.
If you do so, the onus of assessing the investment is much more on you, because galleries tend to be much more savvy about the art market than most people. Besides, they have their good reputation to defend.
Buying directly from an artist is still a realistic option via web and mobile technology. Most art sold directly from an artist is not subject to VAT in Denmark. An artist would have to file a turnover of more than 300,000DKK to be liable to pay VAT. Beyond this point the artist only adds 5% VAT to their art through a scheme known locally as ‘Kunstnermoms.’ Photography was excluded until 2006, but have since then been added to a long list of acceptable definitions of fine art under this VAT bracket. But don’t worry about that part. It the artist’s job to charge the right type of VAT.
Other taxes on art
In Denmark capital gains tax is high, and there is also an inheritance tax called ‘arveafgift’. The latter is capped at 15%.
The characteristics of the Danish art market
Altogether, Denmark is quite a tax-friendly country for art, and there is no ready-baked answer as to why this is. So let’s extrapolate.
To offend a few Danes, Denmark is a somewhat insignificant country with a population smaller than the West Midlands in the UK. With no natural resources, art and design is the export niche the nation has carved out for itself. In addition, the art industry is subsidised and otherwise encouraged in ways that would impress even the Arts Council in England. Much of what we consider ‘Scandinavian design’ is in fact designed by industrial designers, jewelers or Royal College architects in Denmark.
In Fine art, you might think there isn’t much to go for. But there is plenty, and names like Eliasson, Tal R, and Ærtebjerg are selling well internationally.
In Denmark, some of the busiest collectors are the public institutions. The Danish Army is perhaps one of the least likely art collectors, you could think of. Yet it has to spend a small fraction of its budget on buying art every year. Daft? Perhaps, but if most armies in the world reversed the equation, there would be world peace at last.
The more apparent tax differences between the UK and Denmark
Internationally, the Scandinavians are known for having brutal tax regimes. The fact of the matter is that all social security, education, pension, and so forth is included in the tax bill for every citizen and the public services are of high quality indeed. It is one consolidated tax for the entire welfare state.
So when you compare UK with Denmark, please consider that an average middle-class Brit would experience a total tax burden that is almost identical to that of a Danish citizen. It sounds counter-intuitive at first, but if you add up UK PAYE income tax, Council tax, National insurance, green and hidden taxes, fuel surcharges, congestion charges, and university fees, then the Brits pay more a less the same in tax as Danes.
—Not to mention that many Brits pay double for everything they find mediocre when funded over the tax ticket. E.g some won’t risk the HNS, and issue private health plans instead.Their children attend private schools. A state pension tends to result in a shortfall not acceptable to many. Cat food is probably the best meat you can buy if you rely on the aforementioned state pension. Hence private pension plans. Social security is considered a little hit and miss as well, and as a result, Great Britain is awash with mortgage payment protection plans, critical illness covers, and whatnot.