Part 2: The art of gifting Art: Tax Implications for Collectors
applicable tax laws on art giving
In the first part of this two-part digest, we touched on how remarkable gifting art on memorable occasions can be. We talked about key considerations to help you choose the right piece and recommended 5 artworks that would make the perfect gifts. If you missed it, you can head over to read all about it.
In this second part of the digest, we will be delving into the technical aspects of gifting artwork: the tax implications.
In many countries, valuable items are treated as assets and when an asset is gifted, the ‘loss to donor’ principle kicks in. This principle states that ‘when one gives a gift to another, the total value of the giver’s assets have decreased because they have transferred something of value from themselves to another’.
Knowing this, it is important to understand the tax implications in your country of residence, if any. Across different tax jurisdictions, the following questions/scenarios are to be considered:
Is the artwork a stand-alone piece or part of a series?
Is the artwork being gifted by the artist or an individual collector?
Is the artwork being gifted to an individual, an institution, or a charity?
In the case of inheritances, is it made while the person doing the giving is alive or upon their death?
TAX IMPLICATIONS TO EXPECT
It is important to understand the tax implications when gifting and receiving valuable gifts such as priced art. For the sake of this digest, our research focuses on three (3) countries – Nigeria, the United States, and the United Kingdom – and how valuable gifts such as priced artwork are deemed taxable income.
To further make this a less daunting read, we will be considering the three (3) taxes you only need to concern yourself with for now when giving or receiving gifts such as valuable artwork.
Capital Gains Tax
To define, Capital Gains Tax (CGT) is a government levy placed on the profit made from the sale of an asset. For example, if the owner of the original artwork titled Pala created by Emmanuel Dudu decides to sell it, the seller will need to pay tax on the profits made from the artwork. Thus, this tax is only due after the sale of an artwork.
In the United States, the CGT for artwork is 31.8%, it ranges from 10% to 28% in the United Kingdom, and it is 10% in Nigeria.
Inheritance Tax
The Inheritance Tax (IHT) is a tax levied on gifts made during a person's lifetime or after death.
In Nigeria, there are currently no inheritance tax laws.
In the UK, if the gift is given during the donor's lifetime and the donor dies within seven years of the date of the gift, IHT can be 20% of the value of the artwork. However, if the gift is given after death, the IHT is 40%, as such it is a common occurrence to give such assets during one’s lifetime to avoid the higher tax liability.
In the US, there is no inheritance tax. However, there is a federal estate tax and as of 2022, an estate tax of 18%–40% is generally applied to estates valued at or above $12.06 million. In 2023, that threshold increased to $12.92 million.
Business Tax
Business Tax is also called Income or Corporation Tax and it applies to gifts made by businesses.
In Nigeria, businesses are expected to pay VAT on purchases and gifts. In the UK, VAT is also a likely tax when a business gifts an artwork. However, in a case where the artwork is a charitable donation, the business will not be required to pay taxes as they could claim relief in this gift.
In the United States, business tax is assessed at the federal, state, and local levels. This tax is known as the corporate income tax. It is assessed on the taxable income of the business that is categorised and subject to corporate taxation. As a result, gifting art is subject to the same type of taxation placed on proceeds derived from the sale of an asset. The same federal tax rate of 21% applies to all income, including gains from the sale of art. At the corporate level, certain individual deductions might be prohibited (e.g., charitable deductions). Due to the fact that profits are subject to double taxation, corporations are rarely created to hold artwork.
What to do next
Determine the value of the artwork.
After close consideration of yours and the recipient’s tax liabilities, you should aim to get the artwork in question appraised.
Giving artwork should come with the appraisal certificate and ownership transfer paperwork to make sure the recipient understands how valuable the gift is. This is crucial because without them, it will be challenging to tax the artwork that has been given and even more challenging for the recipient to sell it when they want to. This value is crucial since it is necessary to calculate the tax in a precise manner.
Imagine for a moment that the recipient was not informed that a present of artwork had an original value of $500. What do you think will happen at the point when they are ready to sell? More likely than not, they may exaggerate or understate its worth. Both the buyer and the seller can experience dissatisfaction as a result of this lack of knowledge.
Appraising an artwork is not something you should handle by yourself. There is an imminent dilemma that exists when you do not know an artwork’s value. There are specialists who handle such tasks and can determine how valuable a piece can be. This is why art advisory firms like Patrons exist.
In summary, you only need to worry about three taxes; capital gains tax, inheritance tax, and business tax. Determine the value of the art before you give it away. Try not to appraise an art piece yourself, rather, seek the help of professionals like Patrons to help you with this.
Until next digest,
Art is the gift that keeps on giving.
I love this art