Auctioning a gift of Art - How to work out market value and CGT!?

[StereoBug]

A friend of mine has just been gifted a piece of art, by a known artist. It is going to auction with an estimate of £80K.

My friend is self-employed on a very low income but is aware they will have to pay capital gains on what they make from the sale of the artwork. Especially as it stands to be more than 4 times what their taxable income is.

The HMRC website says that when a 'personal possession' asset is gifted, you use the Market Value on the date of the gift to determine what the gains are when it is sold.

Does the auction estimate count as the Market Value? The piece has never been bought or sold before so there is no formally recorded 'market value' that we know of.

What does this mean for the taxable gain? If it sells at £85K is the taxable gain £5k? Or is it £85K because that is the actual gain my friend will have made? Likewise, if it sells for £79K is the NO taxable gain?

We'd appreciate any help! It's a life changing amount of money, the art was kindly gifted as a way to help this person out of immediate financial procarity. They really don't want to mess up the tax. Thank you!

[Lambs]

S,

If your friend has JUST been given a work of art, as your post suggests, then as you rightly infer, they will have acquired it for its value at that point, which surely cannot be much different to the value it achieves at auction. It may be that if the item sells for significantly more, then there is a capital gain, or perhaps instead the original estimate of its market value on "acquisition" (receipt) was too low.

The artist potentially has a CGT issue, if they've held an asset that had value and given it away, then THEY (the artist) could be exposed to CGT (or potentially even Income Tax, although I think the presumption would be a capital transaction), as if THEY (the artist) sold it for full market value at the point of the gift. That may not worry your friend overmuch, though.

With regards,

Lambs

[StereoBug]

Thank you so much, this is very helpful!

[Lambs]

S,

I think it is possible that, if the artist speaks to their own adviser, that adviser might say that the artist has a CGT problem which THEY could remedy by way of claiming something called "gift relief", which would effectively shunt the artist's CGT exposure onto your friend, as and when your friend disposes of the asset. In other words, the artist's CGT liability falls, while your friend's CGT liability increases at the point of auction, sale, etc. I have not checked if "gift relief" is available specifically in these circumstances but I suspect it might be.

It is a joint election to which your friend has to agree - both donor and donee have to sign off on it, otherwise the CGT on the gift remains with the donor - but your friend may feel they have a moral obligation to do so. In fact, your friend may feel they have a moral obligation now to draw the artist's attention to the CGT issue in the first place.

Kind regards,

Lambs

[StereoBug]

Ah ok, an interesting update indeed!

So just to clarify, in the event that both parties sign off on gift relief, would that mean that my friend pays CGT on the gift when they receive it or when they auction it off shortly thereafter?

I guess this takes me back to my original question of whether they'd be paying CGT on 80K or on the difference between 80K and the selling price? Or both?!

Really appreciate all your advice on this - I'm honestly blown away that there is a whole forum of tax professionals who are out there offering advice to people out of the goodness of their hearts!

[robbob]

Really appreciate all your advice on this - I'm honestly blown away that there is a whole forum of tax professionals who are out ther offering advice to people out of the goodness of their hearts!

i will tell you a secret some accountants here use this forum to necessarily hone their own skills - so its not all goodness of their own hearts stuff

[Lambs]

S,

As per my last, the gift relief mechanism basically reduces the artist's capital gain to nil, and increases your friend's exposure when your friend sells - at auction. Your friend has no CGT unless / until they sell but if they jointly sign the gift relief election, then your friend's CGT exposure correspondingly increases, WHEN HE OR SHE SELLS / AUCTIONS / DISPOSES of the item.

R,

Speak for yourself, pal.

I am clearly working off bad karma from several lifetimes ago. Or something.

ps if I had a dime for every time I've seen someone write that they want to "home" their skills or similar, over the last few weeks... Give it a year, and it'll be backed up in proper dictionaries as an alternative meaning, just to placate the mob.

VB,

Lambs

[bd6759]

2 issues

1. If this is a painting the artist has created, the artist will be liable to income tax on it.

2. If it is a disposal for CG purposes, there is no gift relief. (It’s not a business asset.)

[Lambs]

B,

Please see Mason v Innes. So far as I understand things, HMRC does not apply that approach solely to literary works but to artistic works as well. As I said above, I have not checked the availability of gift relief specifically in this case, but if it's accepted as being a capital asset, I suggest we are halfway there.

With regards,

Lambs

[bd6759]

Lambs

Mason has no bearing here. The artist is gifting the painting, not the rights to his painting. Mason applies to intangibles. Wain’s Executors v Cameron confirms the principle that anything produced in the course of a trade or profession is taxed as such.

There is no relief that applies to gifts generally.