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Anyone inheriting art, antiques, or other collectables, will not only be dealing with the grief of losing a loved one but will also very soon face the intricacies of the probate process and inheritance tax (IHT) regime.

In this column, we take a brief look at the tax implications of inheriting art and antiques.

Art and antiques are dealt with in the same way as any other tangible moveable assets for IHT purposes (the family home being typically the main asset that is subject to different rules and thresholds).

Inheritance tax generally becomes payable if the value of a deceased’s estate exceeds the current threshold of £325,000, unless anything above that threshold is left to a spouse, civil partner or a charity and therefore remains IHT exempt.

The estate will also include settled property (property held in trust) in which the deceased had a qualifying life interest.

Expert valuation needed

As part of the probate process, the deceased’s collection of art and antiques will need to be catalogued and valued by an expert valuer.

There are many art advisers and auction houses who offer valuation services but appointing an experienced and qualified expert valuer will be important to lend both accuracy and credibility to the valuation.

That valuation will then be submitted to HMRC as part of the IHT account and, once agreed, HMRC will issue a clearance certificate as long at the executors request one by submitting form IHT30.

It is conceivable that HMRC will raise a compliance review if it considers the collection as a whole, or individual artworks contained in it, to be materially undervalued, but if no such enquiries are raised it would be very unusual for HMRC subsequently to revisit a valuation that was submitted in good faith and for which a clearance certificate had been issued.

Save in very exceptional circumstances, this will hold true even if the heirs subsequently consign artworks for auction and the sales price achieved at auction exceeds the valuation for IHT purposes significantly.

In reality, significant variations between IHT valuation and auction sales proceeds will be rare but could arise, for example, either in the case of a genuine ‘sleeper’, or a subsequent re-attribution of an artwork, say, from a studio work as which it had been valued for IHT purposes to an autograph work of the artist, with a corresponding increase in value.

More typically, an estate collection consigned to auction will see some items sell at about their estate valuation, some below it, and some above it.

While there will not normally be any additional IHT payable if an item sells for a higher amount than that at which it had been valued for IHT purposes, there will equally be no credit given by HMRC if an artwork sells at auction for less than the amount for which it was valued for IHT purposes.

Capital gains

That is not, however, where the tax story necessarily ends because the valuation for IHT purposes will at the same time provide a base line against which future capital gains are assessed.

If an artwork consigned for auction happens to sell for a higher amount than that recorded in the IHT account, the additional sales proceeds may constitute a capital gain for the vendor and give rise to Capital Gains Tax (CGT), albeit at 20%, and therefore a much lower tax rate than the 40% at which IHT is normally levied.

One notable circumstance where an assessment for the apparently lower CGT is not attractive arises if the relevant artwork would have been subject to a spouse exemption for IHT purposes and a tax payment would have been avoided if the artwork had received a higher valuation for IHT purposes, thereby not giving rise to a capital gain.

While the vendor may benefit from a personal CGT allowance, that allowance was reduced from £12,300 per year to £6000 per year in April 2023, and will be cut in half again to just £3000 per year in April 2024 - incidentally, an excellent example of stealth taxation.

While a vendor could in principle space out sales so as to take advantage of their yearly CGT allowances, the reduction in the amount of the allowances will significantly reduce the scope for such tax planning.

It is also quite possible that an auction consignment will exceed its higher sales estimate and will take the vendor (against his expectations and tax planning) outside of the scope of their CGT allowance.

If, for example, a vendor still has their full allowance of £6000 available and the item sells for £6500, CGT will be payable only on the amount in excess of the personal allowance, not on the sale proceeds as a whole. Where the sale proceeds are between £6000 and £15,000, the chattels exemption further restricts the chargeable gain to the lower of the actual gain or five-thirds of the proceeds in excess of £6000.

Given that the vendor will therefore still retain at least 80% of the additional sales revenue, it would be rather unusual for the unexpected auction success to lead to complaints. It remains true, of course, that some collectables, such as clocks, watches, scientific instruments or classic cars, fall outside of the scope of CGT altogether.

If this rather sounds like the taxman will get his share of your money one way or the other, there remain options for tax planning, such as lifetime gifts and post death variations.

Obtaining professional advice will be essential to ensure the effectiveness of such measures in each individual’s personal circumstances.