I have inherited a significant art collection from my grandparents and would like to preserve this for my own children, who are under 18. What tax implications do I need to consider when gifting pieces to family members?
Jack Martin, a lawyer specialising in art and luxury assets at Wedlake Bell, says if you decide to gift pieces from the art collection, you will be making a potentially exempt transfer (PET) for inheritance tax (IHT) purposes. If you survive the PET by more than seven years, the value of the gifted art work will not count towards your estate for IHT.
The less favourable scenario occurs if you die within seven years of making the PET. In this instance, the gift will become chargeable to IHT at a maximum rate of 40 per cent on the amount in excess of your IHT nil rate band (currently £325,000). If you survive the gift by at least three years but less than seven, IHT taper relief may apply to reduce any IHT owed.
You must also be aware of HM Revenue & Customs’ gift with reservation of benefit (Grob) rules. For a gift to fall out of your estate for IHT, the person receiving it must take possession/have full enjoyment to your exclusion. If you gift an artwork but retain it (say by keeping it on your wall), you would need to pay a full market rent to the recipient to avoid a Grob. It is customary for this rent to be fixed at 1 per cent of the capital value of the artwork, but you should have this assessed by a qualified valuer and if rent is paid, this will be taxable income in the hands of the recipient.
When making a gift, obtain a valuation at the date of the gift as this will be relevant should the PET become chargeable. The valuation may also be necessary for capital gains tax (CGT) purposes. The gift will constitute a disposal for CGT purposes and any taxable gain will be subject to CGT of up to 20 per cent (unless gifting to a spouse, which does not incur a CGT liability).
To calculate the liability, work out the difference between the value of the artwork at the date of the gift and the value when you inherited it. Then deduct the annual CGT exemption (currently £6,000).
Gifting artwork to a lifetime trust for the benefit of your children may also be an option. Provided the value of the artwork settled does not exceed your rate band amount of £325,000 (if available), there would be no immediate charge to IHT. Any amount settled in excess of this would be immediately chargeable to IHT at 20 per cent.
Assuming there is no Grob, the value of the artwork (and any increase in value) will be taken out of your estate after seven years for IHT. However, there may be IHT ten-year anniversary charges and exit charges to consider of up to 6 per cent. Another advantage of a trust structure is that any CGT can be “held over” when settling assets, which defers a CGT charge until a later date.
How can I assess my investment manager’s performance?
Our investments have for some years been managed by a third party. I realise we have lived through Brexit and the pandemic so I do not expect miracles. However, the value of these is the same as it was over three years ago. Can I make a judgment on my third party manager’s performance against their counterparts for a given risk?
Graham Harrison, executive chair of ARC Group, which collects the performance of more than 350,000 investment portfolios from more than 140 investment managers, says judging an investment manager’s performance when one feels disappointed at the returns delivered requires two pieces of data: portfolio performance over a defined time period and an understanding of the risk profile followed by your investment manager.
With this information it is possible to select the appropriate peer group comparator and assess your portfolio performance using the ARC Private Client Indices that are available free from suggestus.com or through the Suggestus app. Your portfolio performance and risk profile will be available from your discretionary manager.
Ordinarily, when you give an investment manager discretion over how to invest your money, you are asked to complete a risk profile questionnaire so they understand your goals and objectives for the amount of money you are investing, together with your tolerance and capacity for any losses that may arise over the short or longer term. Find out from your manager the investment strategy being followed and reconfirm that this is still appropriate.
From the risk profiling process, your investment manager will have selected an investment strategy designed to achieve your goals. That strategy will necessarily involve investing in a combination of asset classes: equities; bonds; cash and alternatives. A simple rule of thumb to ensure that you are making a fair comparison of the return that might have been achieved elsewhere is simply to look at the percentage invested in equities (both directly and through funds).
As an example, if your portfolio typically holds somewhere between 40 per cent to 60 per cent in equities, that would broadly imply a “balanced” mandate. Where equities are 60 per cent to 80 per cent of the portfolio the mandate might be described as “growth”.
Once you have determined the risk profile of your portfolio you can make a comparison against the ARC Private Client Indices, which give the returns received, net of all fees, by private investors at over 120 leading wealth management firms. Currently, over 350,000 individual portfolios are submitted and categorised by risk profile to ensure a fair comparison.
After comparing your performance against the average for similar portfolios you can ask your investment manager to explain their performance. They should be able to talk through why their investment strategy has delivered these returns and you can decide whether you are happy with their explanation. Please remember that changing manager can be time consuming and might trigger capital gains tax on the sale of securities.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to yourquestions@ft.com.
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I am plan to update my will and would like to leave a share of my estate directly to my only grandchild, who is under 18, with the remaining bulk divided up equally between my two daughters. What considerations are there?
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