Tax changes alarm UK art market
Income tax and VAT increases mean wealthy art buyers could feel the pinch

By Charlotte Burns and Melanie Gerlis | From issue 222, March 2011
Published online 17 Mar 11

LONDON. The UK art market is in danger of being squeezed by changes to Britain’s tax regime in conjuction with new European Union regulations that affect the trade.

Among the fiscal changes is a Value Added Tax (VAT) increase from 17.5% to 20%, which came into force in January, combined with an income tax rise for the country’s highest paid (earning over £150,000 per annum) from 40% to 50%. Even the bankers are feeling the pinch, with bonuses down 15% on average compared with last year. Many will now be paid in deferred stock options rather than cash. Meanwhile, there is a row brewing over the tax treatment of non-domiciles. The 120,000 people that belong to this coveted tax band, many of whom collect art and other luxury goods, avoid income and capital gains taxes on their overseas earnings. After seven years they pay a recently-introduced annual levy of £30,000. UK Chan­cellor George Os­borne is now believed to be con­sider­ing a more punitive tax regime.

In addition, there have been several laws that directly hit the trade. The infamous EU “lightbulb” law, which charges full import VAT on art made from components such as lightbulbs, has been introduced into the UK (January 2011, p58), while a customs clampdown last summer enraged dealers (July/August 2010, p43). Most pressing is the issue of the artist resale right, due to be extended to cover works by artists who have been dead for up to 70 years, and due to take effect in January 2012.

“Any taxation that makes the wealthy feel less rich can have a chilling impact. In 2008, everyone stopped spending—even those with lots of money. It was psychological,” said advisor Jeff Rabin of Artvest Partners. Tom Lighton of London’s Agnew’s Gallery agrees: “We’re in a period of economic uncertainty, people don’t feel sure of their future income. That has an impact.”

Others fear the wealthy will flee. “Some are looking to move out of the British tax jurisdiction. Ultimately it is easier to do deals from a freeport in Geneva,” said one secondary-market dealer.

British Prime Minister David Cameron offered them little comfort last month when he said: “I would love to see tax reductions, but when you’re borrowing 11% of your GDP, it’s not possible.”

Not everyone, however, predicts such a doom-laden scenario. “While none of the changes are welcome, the art world here shows no sign of slowing,” said Frieze Art Fair co-director Matthew Slotover.

Some also argue that in a global market, an individual country’s fiscal policy is less important than, for example, exchange rate fluctuations or inflation. Furthermore, there are some tax changes that may benefit the UK’s wealthy. Corporation tax is to fall from 28% to 24% by 2014, one of the lowest rates in any major Western economy. And a proposed change to an obscure tax law means that UK-domiciled companies with significant earnings abroad may not pay UK tax on money made in foreign branches, including tax ha­vens—Switz­erland is one of the very few coun­t­ries to take such a liberal stance.

In a market where additional costs such as insurance, commission and storage, are so high, some question what difference these changes will make. “It might put a half-hearted buyer off. But, at auction, the difference between what a seller gets and what a buyer pays is about 30%—and that doesn’t seem to deter people,” said dealer Martin Summers. “The big art buyers are worth tens of millions,” said art advisor Todd Levin. “There might be a slight crimp in their art buying, but there won’t be a significant impact.”