June 11, 2008 / 11:11 AM / 11 years ago

Investing in art... dos and don'ts

LONDON (Reuters) - Interest in art as an investment is on the increase, but there are a range of factors to consider other than what to buy.

A painting on a wall in Portobello Road, west London. The work has been attributed to the street artist Banksy. REUTERS/Dylan Martinez

They range from due diligence and tax considerations to insurance and maintenance.

Investors could otherwise find themselves with a worthless work of art, facing legal action from a previous owner or a huge tax bill.

“People often neglect to treat the purchase of a painting like they would the purchase of other major assets,” says Pierre Valentin, head of the arts and cultural assets team at City law firm Withers.

“It would be rare for an individual to spend a million pounds on a property without turning to independent experts first, to verify the price and viability of the investment.

“Yet many people invest in art for the first time without first ensuring that its history, its seller and its value have been verified,” adds Valentin, who was European counsel at auction house Sotheby’s for six years.

So here is our “dos and don’ts” guide to investing in art.

* Do... seek potential investments from both auction houses and private dealers. If you choose a dealer, ensure they belong to a professional association.

* Do... check the provenance: verify the origin of the painting before purchase. Do not rely on an auction house or dealer to do this.

* Do... verify the seller. Do not be afraid to ask questions about the vendor as well as the painting itself before making a purchase.

* Don’t... invest in stolen goods. Search stolen art databases, such as the Art Loss Register on www.artloss.com to ensure potential purchases have not been stolen.

* Do... beware of war-looted art. Many pieces of art were stolen during the first and second world wars and others throughout the world. Make relevant enquiries.

* Do... beware of illegally exported art. Such works might prove difficult to re-sell and foreign countries might try to claim them back. You could find yourself at the receiving end of a lawsuit. Ask to see export licences before buying.

* Do... take independent advice. As with any major purchase, verify the value of the painting through an independent expert.

* Don’t... forget about insurance. Make sure that you understand exactly when risks pass from seller to buyer, and make sure you have adequate insurance in place from that time.

* Do... make sure your investment is stored and maintained properly to prevent it losing value.

“Like gold, it’s an investment that can cost you to keep,” says Christine Ross, head of financial planning at SG Hambros Private Bank.

* Don’t... overlook tax considerations. You do not have to report the purchase to the Inland Revenue, unless you are VAT registered. In that case, you must decide whether you are going to treat the asset as a business or private asset.

Capital gains tax might be chargeable when you come to sell, although no gain is charged unless the proceeds (before sale costs) exceed 6,000 pounds. If they do, the amount upon which tax is charged is no more than five-thirds of the excess. Special rules apply if the item had formed part of a set.

Ronnie Ludwig, a partner in the private wealth team at chartered accountant Saffery Champness, says: “Private investors are increasingly attracted to alternative assets such as fine art and antiques, but few consider the potential tax liability on their investment.

“There could be tax consequences if the item is sold, given away or left in an estate upon death, and savvy investors should familiarise themselves with the tax rules before making their investment.”

Read Reuters consumer finance blog here

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