A missing masterpiece? How good fortune can lead to a tax headache

05 Aug 2019

The return of ‘Fake or Fortune?’, a spin-off from the BBC’s iconic Antiques Roadshow programme, finds the audience once again on a rollercoaster of a journey which has the potential to identify a genuinely valuable family heirloom – or to dash the dreams of the owners in an instant.

A recent programme followed a painting which had passed down the same family since it’s creation more than two centuries ago.  The painting, thought to be by artist, composer and society hostess, Maria Cosway worth £8,000, was in fact turned out to be a painting by Sir Thomas Lawrence, a leading British portrait painter of the early nineteenth century, with a value in the region of £500,000.  

Quite a windfall, but if the family want it to pass to future generations, what are their options?

The current owner, Hugh, is getting on in years.  If he still owns the painting when he passes away his estate may have to pay Inheritance tax (IHT).  That could be up to £200,000 (40%) on an asset worth £500,000. 

So can he do anything to avoid it?

The family could claim the Heritage exemption if it can demonstrate that the painting is of ‘pre-eminent national, scientific, historic or artistic importance’.  If HMRC agree, specific and onerous undertakings must be given by the family which include allowing some public access, keeping the painting in the UK and preserving and maintaining it.  The exemption works effectively as a deferral of an IHT charge that would otherwise be due as long as the specified conditions are met.

If that fails, Hugh could gift it to his wife who will receive her inheritance free of tax.  However if she wants to pass it down to their daughter in her Will, this would be subject to IHT in the same way as it would have been if the painting had come directly from Hugh.

Hugh could gift it to his daughter now.  If he survives seven years from the date of the gift, it will pass free of IHT.  If he doesn’t, IHT will be payable.  The gift will also trigger a charge to capital gains tax (CGT).  This will be charged on the increase in value from when he received it to the date of gift.  At up to 28%, CGT is less than IHT but its still a large sum of money and if Hugh were to die within three years of making the gift, both taxes would be due.

These detective stories make for great television, but anyone on the receiving end of the sort of good news that can’t fail to send all of us to check on what’s gathering dust in the spare room could find themselves with a tax headache they didn’t expect.  To say nothing of the insurance premium…

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