Globally Speaking | September 28, 2023

The Art of Being a Trustee: Holistic Decision-Making

At an increasing rate, trustees are finding themselves in a position where they are entrusted with administering trust funds that comprise (directly or indirectly, via underlying companies) luxury assets, such as high value artwork. The reasons for such assets being held in trust will vary, but typically include art collections passing into testamentary trusts of residue upon death; tax considerations during lifetime dictating the creation of inter vivos trusts; succession planning driven by the desire to avoid fragmentation of ownership and ensure that heirlooms and other valued objects are preserved for the family bloodline; as well as the need to retain flexibility with families becoming more international and their personal circumstances and taxation environments less predictable.

While professional trustees will be well aware of the need for bespoke UK tax advice at every relevant junction, this is perhaps less true of beneficiaries and, by extension, Private Trust Companies (“PTCs“) acting as trustees of such trusts where the PTC board comprises family members alone. Even with professional trustees, who have taken perfectly sound tax advice, it is rare for such advice to comment from the perspective of the specific characteristics of the assets involved, which can lead to unanticipated and often adverse tax consequences.

Take the example of a UK resident, non-UK domiciled beneficiary of a foreign trust. The trustees are holding a valuable paintings collection and the beneficiary, living in the UK, requests that they be permitted to enjoy some of the paintings at their chalet in Switzerland.

While there is UK legislation in place that looks to tax the beneficiary on any benefits received where the trust is generating income and/or gains, such taxation will not apply where the beneficiary is a remittance basis user and the benefit is enjoyed abroad. The trustees, having taken suitable tax advice, accede to the beneficiary’s request and the paintings are shipped in due course to the beneficiary’s Swiss home.

However, as the skiing season draws to a close and the beneficiary heads back to the UK, unbeknownst to the trustees, so do the paintings.

This could lead to a range of UK tax issues.

  • Firstly, any benefit, being the rent-free use of the artwork by the beneficiary in the UK, will be taxable in the tax year of receipt; the cash value of such benefit is deemed to be a sum equivalent to the official rate of interest multiplied by the trustees’ acquisition cost for the artwork.
  • Steps can be taken to mitigate the tax exposure; for example, by asking the beneficiary to pay a commercial rate for their enjoyment of the paintings. However, even a commercial rent for use of the artwork may not equate to the deemed cash value of the benefit.
  • Any rental payments received by the trustees will cause (further) income to arise in the trust. Such income may have a UK source and will be available for matching against capital payments or other benefits received by the trust beneficiaries. If the trust has until that point been “dry” of any income and gains, past benefits enjoyed in the UK may come into charge as a result.
  • Depending on how the trust has been funded and to the extent that the artwork represents the settlor’s previously unremitted income and gains, a taxable remittance of these may arise on the paintings coming into the UK, unless there is an applicable exemption.
  • Further, consideration should have been given to custom duties that may be in point in the UK and the availability of any exemptions. The ability to claim such exemptions may have been compromised where the beneficiary failed to appreciate the potential for import duties to apply and plan for these proactively. In a more extreme scenario, suppose that the beneficiary drove back to the UK, with the paintings tucked in the boot of their car, potentially picking up customs duties in multiple jurisdictions as they cross from one jurisdiction into the next, which would not be unusual with portable assets.

A trustee is ultimately responsible for managing the trust assets; it is the independence of the trustees’ decision making and being evidently in the driving seat that ensures the integrity of the structure and protects against unintended consequences. Trustees of a settlement with high value chattels may well find themselves at loggerheads with a beneficiary, but it is important that decisions are made by the trustees, bearing in mind the various implications that may arise when a beneficiary has a moveable trust asset in their possession.

Apart from taxation, suitable insurance needs to be in place both when moving the art and upon its arrival in Switzerland or any other jurisdiction, and appropriately specialist shippers should be selected to crate and transport the art. The added benefit of specialist shippers is that they can deal with import and export formalities and practicalities, including import duty and possible work-arounds such as “temporary admission” procedures. However, shippers’ usual terms and conditions, when it comes to covering damage and loss, are restrictive, so thought needs to be given to whether short-term movements of art for the sake of beneficiaries’ enjoyment can be justified – this will partly depend on the value and fragility of the items in question.

Ultimately, art and other luxury assets are unusual in that besides being investments and repositories of wealth they are also (and some beneficiaries may say mainly!) items to be enjoyed and interacted with. For this reason, the risks that trustees can potentially justify (such as permitting art to travel with beneficiaries around the globe) are wider than with more traditional physical investments such as gold.

We are always able to advise on the tax, trust, shipping, insurance, import/export, conservation, restoration and succession issues that arise with luxury assets, as well as help with necessary pre-purchase due diligence to establish suitable provenance and authenticity.