Knight Frank’s 2023 Wealth Report shows art as having increased in value by 29% in 2022, topping the Knight Frank Luxury Investment Index as the best performing luxury asset class over the last 12-month period. As more investors consider art as a potentially lucrative asset, we take a look at some of the practicalities of art collecting. Here are our top five tips.
1. Do the due diligence
Due diligence is the number one priority when considering an art purchase. Checking the provenance of an artwork before it is acquired is vital to ensure the collector is getting what they’re paying for and that value is upheld going forward. This should be done by an independent art consultant, ideally one with specialist knowledge of the artist or genre in question.
2. Consider tax implications
Once a piece has been purchased, planning may be required around tax issues. Where is the piece going to sit? Will it be held directly or through a holding vehicle such as a trust, foundation or company? Will it need to move cross-border? It’s important the collector seeks expert tax advice to plan accordingly.
3. Monitor that asset carefully!
As with any high-value asset, monitoring is a must. Detailed records, regular stock takes and periodic valuations are all of the utmost importance. They will most likely be required for insurance purposes too. Indeed, insurance is a big matter and art has particular needs. For example, dim lighting and humidity control monitors will help protect the art from damage. And, given the portability of art, security is also crucial.
Unlike real estate and larger moveable assets such as cars and yachts, fine art can go missing relatively easily. During divorce proceedings, for example, a spurned spouse might see fit to take a piece of art off the wall and walk away with it. Moreover, in cases of art used to decorate a large property, the absence of an individual painting or sculpture may go unnoticed for some time. Given this risk, detailed cataloguing and regular inventories are vital to keep track of all individual artworks, ensuring they are where they’re supposed to be and that they remain in the family’s possession.
4. When it’s time to sell
When it comes to liquidating the asset, there is an art to selling art! Again it comes back to monitoring performance; beyond finding the right buyer, the key is identifying the right time to sell. For instance, if a Modigliani recently sold for a record price and you have two Modiglianis, then it may be time to part with them.
5. Or will you keep it in the family?
The unparalleled subjectivity of art means it’s also an interesting one in terms of the desirability of the asset. For example, a patriarch may have an overwhelming passion for Klimt’s work while his child is sick to death of seeing it. If the child goes on to inherit the Klimt collection, it most likely won’t be in the family for much longer. Certainly at IQ-EQ we have received a number of requests over the years for discreet sales following art inheritance.
In cases where a family owns a sizeable art collection, succession planning can present particular challenges with regard to the fair ‘divvying up’ of the asset. What to do when you have ten paintings and three children to split them between?
Beyond tax efficiencies, structuring an art collection through a trust or company offers significant benefits in terms of asset protection and succession planning. The collection effectively becomes ‘ring-fenced’, from individuals and from other assets. When the time comes to pass it on to the next generation, this can be achieved cleanly and evenly through allocation of shares in the company holding the art – rather than worrying who gets the Water Lilies and who gets the Haystacks.
