Art investing: Looking at the bigger picture

 
Philip Salter
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PICKING winners in art, as with any investment, isn’t easy – but holding it is a shade more pleasurable than owning shares. Chancellor George Osborne’s announcement in his Autumn Statement that gifts of pre-eminent art to the nation will increase from £20m to £30m in lieu of inheritance tax is an attempt to stimulate gifts of future national treasures. Its impact will likely be marginal, but this doesn’t mean investors shouldn’t own art as investments – the key is hedging yourself by liking what you buy.

NOT GRAND ENOUGH
Simon Weil – chair of the European Association for Philanthropy and Giving (EAPG) and charities and private wealth partner at Bircham Dyson Bell – thinks the test of pre-eminence is not the best option for assessing tax reductions for gifts of art work. Weil says it “sets the bar too high,” and thinks “a better option would be to revert to the museum quality test, which has a lower threshold than pre-eminence and was used as the test for exemption from inheritance tax until 1998.” The issue of pre-eminence also begs the questions (not yet answered): How will pre-eminent art be defined and who will decide what qualifies?

Weil also believes that “if income tax reliefs were introduced for outright gifts of art works, which mirrored the reliefs available for gifts of quoted securities and land, we would see a sharp increase in donations.” He thinks this has proved highly successful in the US and would involve a simple expansion of the existing UK income tax relief regime to include a further class of assets. Leonie Kerswill, tax partner at PwC, thinks “being able to gift during lifetime with immediate tax breaks might encourage more people to consider making such gifts.”

Using art to pay down the bills can lead to disgruntled descendants, says Ronnie Ludwig of Saffery Champness. “Taking out life cover equivalent to the net value of the gift provides a way around this,” says Ludwig. He notes “by writing the policy in trust for your children and then ‘paying’ for the premiums out of the tax relief on the gift, you will have both benefited from valuable tax relief in your lifetime, and restored the family fortune (at least in cash terms) on your death.” He explains that the policy payout also escapes inheritance tax, making this a more efficient way to pass on wealth. However, the relief won’t be equal to the value of the art. Lexis PSL tax lawyer Robert O’Hare notes “it is unlikely to be more than 50 per cent.” We will find out the figure when the legislation is published.

GENUINE ARTICLES
William Easun, a tax and private capital partner at Lawrence Graham and formally a director of Christie’s in Monaco throughout the 1990s, thinks art has unquestionably proven to be a wise investment diversification for portfolios. He says although mistakes have been made and some markets have fallen back, with good advisers and judicious choices, art has been their best investment choice for many.

Ruth Knowles of The Fine Art Fund says they typically tell investors not to put more than 5 per cent of their net worth into art, as it is a long-term investment, which can be relatively illiquid – depending upon how you invest in the market. She also points out that it’s a very large and diverse market: “The top 10 per cent of the contemporary market will behave very differently to the bottom 25 per cent of the contemporary market.”

Founder of the online valuation service ValueMyStuff.com Patrick van der Vorst suggests that when it comes to the buying stage, people should ask for a third party independent opinion. He notes: “Historically, the best collectors, such as the Rothschilds or the Royal family, always had a pool of art advisors, and this counts on a more modest level as well.” Ludwig says “there are a lot of convincing forgeries on the market and buying a fake is a huge risk.” Van der Vorst suggests people buy against market trends, noting that traditional silver, furniture or ceramics are currently seen to be unfashionable.

Russell Singler, owner of Art You Grew Up With, says “our philosophy is buy what you love, but know what you’re buying.” Director of Mayfair’s Sumarria Lunn gallery Will Lunn always advises buyers to acquire work that they like: “Then investment errors are not so hard to bear.” Singler thinks finding a trusted source to help is important, encouraging clients to build their own points of reference so they know what is a strong investment piece and what isn’t. He suggests attending art sales, but bringing a trusted person to question you.

“Art that is portable offers yet another kind of diversification,” says Clem Chambers, chief executive of ADVFN.com – “assets you can move are the ultimate hedge against troubled times. Stamps and coins are the classic examples, art fits within this category, too, so long as it’s portable.” As pessimistic as many are becoming about the future of Europe, there is a chance it will turn out worse than many dare imagine. A man pondering on the coming decades in 1900 could not have foreseen the turmoil that was soon to erupt across the globe.