By Arthur Byng Nelson, Solicitor and Legal Director at law firm Harold Benjamin.
Introduction: Clients with Art
For some wealthy individuals a great deal of their income is spent on art or other luxury assets. Levels of spending can be such that significant proportions of their wealth are represented by their collectibles.
As a solicitor advising individuals and trustees who hold art I see a growing expectation from these individuals that their financial advisors see the wider picture and acknowledge assets of passion as an important part of an individual’s or trust’s capital holdings.
What follows is a few points of interest to bear in mind when advising collectors.
Borrowing: Art as Collateral
To the horror of some art aficionados, art can be referred to as an “asset class”. What is certainly true is that there is scope for leveraging the capital tied-up in collections: to create liquidity by borrowing against the art. Changes in laws worldwide to counter money-laundering have resulted in private banks reducing their risk appetite and therefore being more reluctant to offer such financing. COVID has exacerbated this situation. Specialist art-backed lenders have been increasingly filling the gap. According to figures published in this year’s Art & Finance Report by Deloitte art-secured loans in 2021 and 2022 are estimated to grow 19% per year for asset-backed lenders (9.4% per year for private banks) with the overall art-secured lending market reaching a projected US$26.6 billion to US$31.3 billion by 2022.
Lending Art to Institutions
Lending works of art for display in museums can increase their market value. The art market highly values exhibition histories of pieces: if the piece has been exhibited at one or more institutions its acceptance at this academic level lends confirmation of a piece’s importance and therefore its market appeal. An additional bonus for the lender is that storage costs are reduced to nil and the cost of insurance will generally be borne by the host institution. In all cases my recommendation is a written contract between lender and borrower to set out clearly the respective obligations (such as packing and shipping, copyright and reproduction rights, repair and restoration).
Three Tax Incentive Schemes for Clients with Pre-eminent Items
A broad range of assets will be considered but to be confirmed as “pre-eminent” the asset must be of national scientific, historic or artistic interest. The Arts Council have a panel of experts (supported by museum curators, scholars and members of the art trade) that determines the question of pre-eminence and agrees a value for the piece, reporting its findings to HMRC.
