If you are thinking how to reduce your tax bill and feel dreadfully bored of the familiar tax deduction schemes, then art philanthropy can be what you have been searching for. Cultural philanthropy not only enriches the art sector of a country but also provides attractive tax incentives for donors.
In addition to various tax regimes aimed at protecting and nurturing artists, a number of jurisdictions (France, UK, Mexico, etc.) allow their taxpayers to donate property, including works of art, instead of paying taxes.
This article will discuss two UK tax schemes related to works of art, which allow individuals and corporations to reduce their tax bills, namely, Acceptance in Lieu (AiL) and The Cultural Gifts Scheme (CGS). Moreover, tax incentives related to cultural philanthropy in France, The Netherlands, Mexico, and the U.S. will be briefly outlined.
The further discussed tax schemes can be advantageous for taxpayers because they act as a ‘tax credit’ system, which can be more valuable than a ‘tax deduction’ system. While ‘tax credits’ offset the tax payable by a taxpayer, ‘tax deductions’ only reduce the taxpayer’s taxable income to which the applicable tax rate applies.
Acceptance-in-Lieu (AiL) scheme was introduced over a century ago in the UK. The annual reports indicate that the AiL is a successfully functioning scheme, which has gathered over £120 million over the past three years.
Currently, in the UK, the AiL scheme is administered by Arts Council England, which provides advice on pre-eminence, valuation, condition, and allocation of donated artworks. The scheme allows a taxpayer to transfer artifacts having cultural and historical significance instead of a partial or full payment of (1) inheritance tax, (2) capital transfer tax, or (3) an estate duty.
The AiL tax incentive is beneficial for both parties. On the one hand, museums, galleries, or public archives acquire ownership of important artworks and cultural objects, expand their public collection, and prevent exports of art works. On the other hand, the scheme is beneficial for owners of the artworks because the items donated in lieu of tax are valued about 17% more than if they were sold on the open market. The Arts Council England proposes the following illustration of the benefits for an offeror: “for example, if, in order to settle a tax liability, an estate sells an object valued at £100,000 on the open market, inheritance tax is generally payable at a rate of 40% and the estate receives £60,000. If the same object is offered in lieu, 25% of the tax that would have been payable is remitted to the estate, with the result that the object has a tax settlement value of £70,000. An object is, therefore, worth 17% more if it is offered in lieu of tax than if it is sold on the open market at the same price.”
In the UK, the AiL scheme can be used by anyone who is liable for the payment of an existing inheritance tax bill and can offer an object in part or whole payment of the tax. Only objects of a cultural, historic, artistic, scientific, or local significance are relevant to the scheme. An offeror can donate works of art, manuscripts, heritage objects, historic documents, as well as land and buildings (separate rules apply) in lieu of the abovementioned tax. The value of the object offered is determined by the AiL panel, which consists of independent experts.
In addition to the existing AiL scheme, The Cultural Gifts Scheme (CGS) was introduced in 2012 in the UK. CGS was designed to boost philanthropy by living individuals and corporations. The Cultural Gifts Scheme, which runs alongside the AiL, offers a tax incentive for taxpayers who are willing to gift chattels for public benefit. The new tax scheme encourages people to donate a pre-eminent work of art or a heritage object to the nation within their lifetime in exchange for a partial offset of (1) their income, (2) capital gains tax, or (3) corporation tax. For individuals, the tax reduction of maximum 30% of the value of the donated object can be provided. For companies, 20% of the object’s value can be offset from a corporation tax. Cultural objects, such as pictures, prints, books, manuscripts, works of art, and scientific objects of cultural and national interest, are eligible for the CGS.
Under the Cultural Gifts Scheme, in 2012-2013, a collection of manuscript letters and lyrics by John Lennon, including the autographed manuscript of the lyrics to Strawberry Fields was declared for tax purposes. In 2014, the UK gained art works and heritage items for the total value of £44.3 million. £30 million tax was settled under the both existing tax incentive schemes related to the works of art. This year, a significant collection of 37 paintings by Sir Winston Churchill was accepted in lieu of almost £10 million tax.
In France, a similar tax incentive scheme, the ‘dation en paiement’, functions almost for 50 years. After the provisions introduced in 2003 by the French government, the tax incentives actively encourage the taxpayers not only to support the national art sector but also to donate art pieces to public collections. For example, French investment conglomerate AXA is an active participant in cultural philanthropy. The company transmitted a number of cultural works of a major interest for the country’s leading museums, such as the Louvre and Musée de la Renaissance, in exchange of tax reductions on the corporate tax bill.
Similarly, in the Netherlands, taxpayers are allowed to pay inheritance tax with moveable works of art. Although this tax incentive is similar to the UK ‘Acceptance-in-Lieu’ scheme and the French ‘dation en paiement’ in terms of historical and cultural qualification, the Dutch tax regime is different in two aspects. Firstly, 120% of the value of the artifact is acknowledged. Secondly, unlike in the UK and France, the Dutch government does not disclose the number, origin, and type of artworks that have been acquired through this tax incentive.
Mexico applied a much looser tax incentive scheme than the discussed European countries. Mexican artists of plastic art disciplines, such as sculpture and painting, are allowed to pay their annual tax obligations with their own pieces of art. If the proposed artwork meets the quality criteria regulated by a panel of experts, it can be accepted in lieu of a tax duty. However, if the proposed sculpture or painting lacks of quality determined in the guidelines and is rejected for three times, the tax must be paid in cash. The best Mexican artworks acquired through this tax incentive are proudly displayed at the Finance Ministry’s Museum in Mexico City or at other museums around the country.
The tax system of the U.S., the center of world’s philanthropic sector, provides the taxpayers with a number of mechanisms to facilitate donations. The tax incentives related to philanthropy can be applied to (1) income tax and (2) capital gains tax. While companies are allowed to write off not more than 30% of their income, the individual taxpayers have a possibility to deduct up to 50% of their taxable income if they participate in philanthropic activities. These charitable deductions can be applied for a lifetime gift or work of art transferred to a charity/non-profit organization. Similarly as in the abovementioned countries, the donated item has to receive verification from a panel of experts. The size of deduction depends on various factors, such as the type of charitable organization, the kind of property, and qualified appraisal.
In the light of the aforementioned observations, it can be concluded that a recognition of the importance of art and philanthropy in the management of a country can have positive implications on taxpayers. By donating valuable works of art, individuals and companies not only contribute to the benefit of public wealth, but also can gain attractive tax reductions. Thus, isn’t it time to review your own art collection?