When someone sells art in the U.K., they are unlikely to be surprised that any capital gain realised will be subject to tax. What might be surprising, however, is that the purchase of art can sometimes trigger a tax charge too.
Many international taxpayers residing in the U.K. will be regarded as ‘resident but non-domiciled’ and permitted to benefit from the ‘remittance basis’ of taxation for non-UK income and capital gains.
Under the remittance basis rules, non-U.K. income and capital gains will only be taxed in the U.K. if remitted. Even if an individual no longer claims the remittance basis, they still need to apply the remittance rules in respect to offshore income/gains realised in a prior tax year when the remittance basis was claimed.
The definition of a remittance is, unfortunately, wide reaching. It will include not only straightforward transfers of money from a foreign bank account into the U.K., but also property and services used in the U.K. (either by the taxpayer or certain ‘related’ parties) that derive from non-U.K. income/gains e.g. where an asset is purchased using funds from a foreign bank account which is subsequently imported to the U.K. Pre-residence funds, if kept segregated, can be used without any tax implications.
There are several exceptions to the general rule outlined above, which ensures that certain property can be remitted to the U.K. without attracting a tax charge (although import duty/VAT would still be in point). The six categories of exempt property are:
- Clothing, footwear, jewellery and watches which meet the personal use rule
- Property where the notional remitted amount is less than £1,000
- Property which meets the public access rule
- Property of any description which meets the temporary importation rule
- Property of any description which is in the U.K. only for the purposes of repair
- Works of art brought into the U.K. specifically for the purposes of sale subject to the sale proceeds being removed within 45 days
All these exceptions only apply for property that is purchased outside the U.K. and then imported into the U.K. If cash funds are transferred to the U.K. to purchase art directly, then none of these exceptions will apply and the remittance rules will need to be considered.
We have seen the tax authorities in the U.K. becoming increasingly active in this area. We know they are reviewing in detail sales made through U.K. galleries and auction houses and also looking carefully at the declarations made when calculating import duty/vat. Therefore, we are seeing many enquiries focussing on the source/destination of purchase and sale amounts.
When purchasing art, it is vital to understand if a remittance issue exists and, if so, whether any exception might apply.
Of the six exceptions, the last four are of most interest to major art buyers/sellers, with the last two exceptions being self-evident. We will therefore explore how someone might benefit from ‘the public access rule’ and ‘the ‘temporary importation rule’.
To meet the public access rule, four conditions must be met:
The property should:
- Be a work of art; a collector’s item or an antique
- Be available for public access at an approved establishment (including in storage or transit)
- Be available for public access/in transit/storage for no more than two years (or such time as is agreed with the U.K. tax authorities)
- Attract a relevant VAT relief
This rule is deliberately restrictive and only in rare circumstances will an individual be able to agree with the tax authorities that art housed in property they own will qualify.
The temporary importation rule applies, whereby the property is in the U.K. for fewer than 275 ‘countable-days’. This allows for some limited personal use but is also often used to help taxpayers correct mistakes when they have imported art without considering the tax consequences.
Even where an exception initially applies, a tax charge might arise when the property ceases to meet the exemption conditions, although special reliefs might apply if the property is sold.
Taxpayers who have benefitted from the remittance basis of taxation will need to take care when purchasing art to ensure that the funds used to make the purchase are not subject to a remittance tax charge. This applies both to purchases made in the U.K. and those imported. For art that is imported, some reliefs may apply but these are quite restrictive. Therefore, it is vital that taxpayers potentially impacted take detailed advice on this matter.
Senior Tax Manager
236 Gray’s Inn Road, London, WC1X 8HB, UK