UK-based art collectors should be looking carefully at new tax rules that came into force on 6 April. The rules, which have largely gone unnoticed except by tax specialists, apply to resident non-domiciled individuals (non-doms) who have lived in the UK for a long time but have a permanent home elsewhere. They could now be liable for tax on any art they sell, even if it is held outside the UK.
Previously, if non-doms claimed the so-called remittance basis, an alternative tax treatment, they paid tax only on income and gains brought into the UK. This status could potentially last indefinitely. So someone born outside the UK—a Russian national, for example—who came to live in the country and became a non-dom did not have to pay tax on profits from the overseas sales of any of their holdings.
But under the new rules, once a non-dom has been a UK resident for more than 15 years the remittance basis will no longer be available and they will be liable to UK tax on income and gains arising anywhere in the world, including the sale of art held abroad. In addition, the art will be subject to inheritance tax on their death, even if it is kept abroad. This could eventually affect people such as Roman Abramovich and Lakshmi Mittal, both of whom are non-doms with considerable art collections.
Tax specialist Fiona Graham of law firm Boodle Hatfield advises non-doms to think about putting art into a trust, rather than owning it personally. This could, she says, mitigate their tax exposure in the long term, although she warns that it is a complex issue that needs careful consideration.
The tax changes are even more draconian for non-doms who were born and originally domiciled in the UK, then moved abroad and had their permanent home elsewhere, before returning to the UK and resuming their residence in the country.
Graham explains: “Under the old rules, if you were born in the UK but lived abroad and kept your art collection there, even after you returned to the UK it was not immediately subject to inheritance tax, and any profits on sale were also not taxable. But now once you return to the UK, after a year your offshore art collection will be taxable on your death and immediately if sold. Further, owning the art through trusts will not mitigate the tax liability for these resident non-domicileds.” She added that the recent decision to hold a snap election in the UK is unlikely to have any impact on the new measures.
UPDATE: The government has recently dropped the proposed changes from the Finance Bill. It is unclear whether the Conservative party would revive the plan if it wins the next General Election on 8 June.
