Investing in Art: Future-Proof Your Collection

Artdecision’s Kristen Knupp speaks with Suzanne Lauritzen, Managing Director, International Tax Advisor at Bonhote Services SA

What are the biggest issues for art collectors from a legal and tax advisory point of view?

I would say that the tax and legal issues for someone who is collecting art are principally related to “value protection”.  Art is becoming an increasingly important investment, due both to the increased interest in art as an alternative investment asset and due to the important increase in prices in art transactions.

From a legal point of view, in order to ensure and preserve the value of art, it is essential to ensure that there is satisfying documentation and proof to guarantee the art work’s authenticity, quality, origin and traceability as to previous owners and transactions. Before any transaction, a thorough due diligence should be made of both the art work and the parties involved.

From a tax point of view, the biggest issues are often related to the transactions, such as selling art work or transfer of art by donation or succession. There may also be issues relating to the holding of art such as wealth tax.

An analysis of the tax and legal issues should preferably be made before investing in art, in order to analyze the best way of acquiring art in view of the purpose of the investment, for example long-term or short-term holding.  

For someone who is holding art since a long time, it is important to consider and plan for the future, for example if the art should be a part of the succession for future generations or rather donated for charity.   

At what point does an art collection become important enough to consider using professional advisers like Bonhôte Services SA?

When it comes to wealth and/or succession planning an art collection is generally only one component of an art collector’s wealth. It should not be separated out but considered in relation to the collector’s overall personal and wealth situation. 

The need of advice cannot be based only on the value of the art work, even though, of course, higher values imply higher risks or more important consequences.  Holding of art and thereto related transactions may imply high costs. It is therefore important to first identify the values and risks at stake and then compare the costs of mitigating risks and/or optimizing the situation for the specific need or objective. 

How can one “future-proof” their art collection?

There are three main stages where tax and legal aspects should be considered:  

  1. Upon the acquisition
    Here, a due diligence shall be made to check and verify e.g. the artwork’s provenance and authenticity. 
  2. The holding of the art
    This is related to the costs of holding an art collection. How shall the financial needs (such as storage, transport, framing etc. ) be ensured, what insurances are needed etc.This often has an impact on the decision of whether the collection should be held indirectly, though a company or trust for example.
  3. The future: 
    A plan is needed for the future of the art collection. Will it be sold, held, passed on to heirs, given to charity or lent to institutions?  A disposal strategy should be established. The goal of planning in advance is to prevent a forced sale by unexpected costs or problems and also to consider the future tax and legal implications for e.g. heirs, their financial situation and needs. 

What are the biggest financial mistakes collectors make?

One mistake is not being aware of or not considering the different issues to look out for when collecting art. 

As already mentioned, there are many embedded risks when investing in art; its illiquid character, the costs related to the conservation, storage and also transaction-related costs. It is important to identify them and do the best to prevent unforeseen events. 

Another mistake is related to the price. With contemporary art in particular, buyers often come too late to the market and they buy what is being hyped and therefore might have already reached the top of its market value. Investment should therefore be accompanied with advice from art experts knowing the market in question. As a general rule, when it comes to investment in art, the time horizon should be quite long, for example 15 years, considering the high costs involved in art transactions. 

However, as an overall and general principle, since you cannot foresee everything, art should also be bought for passion and not for pure investment reasons. If the purchase is based on passion, unexpected financial situations can better be accepted. 

What is personally your favorite museum or art collection in Switzerland?

I love to travel and visit museums and art collections around the world.  In Switzerland, I enjoy going to the Fondation Beyeler, as much for the architecture as for the art and nearby I also enjoy the Vitra Design Museum.  In Sweden, where I come from, I especially enjoy the Fotografiska, the Photography Museum in Stockholm. I can also add that Louisiana, just outside Copenhagen, often have very nice exhibitions too.