Handling the issue of managing fine art collections that straddle global borders is a challenge - but also opens a range of opportunities. Two experts in the field examine the issues.

A new study just released by Fine Art Wealth Management in collaboration with Constantine Limited takes a close look at moving art across borders and the minefield of official documents which face collectors with international lifestyles and artworks located all over the world. This is part one of a two-part feature. It is being run on this news service and sister publications, as the subject of the article is, by definition, global in scope. The authors are Randall Willette, managing director, Fine Art Wealth Management, and Tim Sutton, MD, Constantine Ltd. This article is reproduced here with permission.

Foreword

Whether driven by personal enjoyment or pure financial return, art is one of the most popular investments of passion for high net worth individuals having experienced significant growth in recent years. Now in rebound following the financial crisis, art is increasingly becoming a meaningful element of HNW individuals’ portfolios.

Many sophisticated collectors have international lifestyles with businesses, homes, and art assets located all over the world. Risks of damage to art from packing, shipping, storage and installation can arise not just in one country but in a number of different countries and collectors require bespoke art logistical services tailored to their needs.

Clients who regularly move art across borders understand the importance of complying with import-export regulations and will normally seek advice before shipping works of art. They know that crossing borders can trigger tax liability and it is critical to understand the implications. Given that illegal export is an offence in many countries this may affect the resale value of an art work or an entire collection.

It is important that a collector seeks professional advice to guide them through the minefield of official documents, export licenses, and regulations as well as organize the most appropriate method of transport.

The continuing development of freeports has been another notable trend in the last few years in Europe and Asia. Regulations have changed and you can now bring artworks into customs-approved fine art agents’ warehouses and enjoy the same tax benefits as freeports.

With private art collections becoming a greater part of overall personal wealth, sophisticated collectors would be prudent to ask a few key questions of their art transport company to ensure they meet certain standards of best practice. This paper lays out general insights around moving art across borders and how proper art handling is critical to preserving and protecting a family collection.

The rise of global private collectors

A new generation of collector is emerging for whom art has increasingly become a part of their overall wealth management strategy. Of the world’s 2,170 billionaires, the average holding of art is worth $31 million, according to Wealth-X research, or 0.5 per cent of their net worth. But the world’s top ten billionaire art buyers take collecting to a whole new level. They love art so much that they have an average 18 per cent of their net worth invested in art according the report. Buoyed by a convergence of the old and new, surging sales at auction are reflecting an emerging class of newly wealthy collectors investing in art. According to the latest annual report just released by the European Fine Art Foundation (TEFAF), the international art market reached €47.4 billion ($64.6 million) in total sales of art and antiques in 2013, close to its highest ever recorded total, and advancing 8 per cent year-on-year.

The data gathered and analyzed for TEFAF by Dr Clare McAndrews, founder of Arts Economics, also shows there were 32 million millionaires worldwide in 2013, with 42 per cent of those based in the US. At least 600,000 of this global group are mid-to-high level art collectors (less than 2 per cent of the world’s millionaire population). While sales in the US in 2013 increased by 25 per cent in value year-on-year, confirming its position as the key centre worldwide for sales of the highest priced art; the Chinese market experienced more cautious buying in 2013, with low positive growth of 2 per cent.

The EU has been one of the most stagnant regions of the art market, with sales falling by 2 per cent in 2013. Although the TEFAF Report focuses its attention on the US and Chinese art markets in particular, according to the 2013 Capgemini/RBC World Wealth Report, art is also seeing a jump in popularity worldwide, with UHNW individuals in emerging markets setting the pace. However, while the spending of high net-worth individuals has been critical for the development of art markets in many regions, in emerging markets increasing prices for art and the value of art sales have been driven by a relatively small portion of the nation’s population.

Whether driven by personal enjoyment or pure financial return, HNW individuals cited art as one of the most popular investments of passion having experienced significant growth in recent years, especially among emerging markets. Now in rebound following the financial crisis, art is increasingly becoming a meaningful element of HNWI portfolios comprising 16.9 per cent of investment of passion allocations.

Moving art across borders

Many sophisticated art collectors have international lifestyles with businesses, homes, and art assets located all over the world. According to Art Economics, the growth and global distribution of wealth and the rapidly increasing movement of art across borders are clearly correlated.

However, in spite of a wider geographical distribution of art buyers, the bulk of the art trade by value still takes place each year through key established international hubs, most notably the US and UK, but also including the smaller market centers of Switzerland and Hong Kong. The bulk of art imports and exports continue to flow through London and New York (accounting for a combined 65 per cent of exports and 69 per cent of imports by value), despite the fact that the eventual buyers may reside elsewhere.

Although there have been some minor fluctuations year-on-year, this dominance has not changed significantly since the 1980s. The success of these art market hubs is therefore not simply derived from a healthy local demand and sufficient national wealth to support sales, but also from having the power to import and assemble art sales that attract international interest, as well as having a favorable legal and fiscal environment and the necessary skills and services to support the trade.

While the report states there is a link between national wealth and art sales, import demand for art is not fuelled solely by domestic wealth. Imports into an international hub such as the UK or US are supported by the existence of the market itself and its ability to bring together enough desirable works of art and antiques for sale to attract both local and international art buyers.

Import and export statistics help to illustrate the rapid globalization of the market for art and antiques, and demonstrate the importance of both wealth and an open trading regime. According to Art Economics in their TEFAF Art Market report 2014, world imports of art and antiques reached a total of €17.6 billion in 2012, a 19 per cent increase year-on-year and the highest total yet recorded. The US and UK accounted for a combined majority of 69 per cent of world imports as they continued to attract both international and domestic demand for art and antiques. Switzerland also maintained a high share of world imports at 8 per cent. World exports increased 25 per cent year-on-year to a new record high of €18.0 billion in 2012, their highest ever recorded level.

The UK and US together accounted for the majority of the value of exports of art, with a combined share of 65 per cent underlining their importance as centers the for the art trade. The UK was the largest importer and exporter of art globally and a net importer of art, with imports of €6.1 billion exceeding exports of €5.8 billion, both just marginally ahead of the US. Switzerland was the third largest importer and exporter of art and antiques, with share of 8 per cent of imports and 7 per cent of exports.

Export/import regulations

Export control is the process which makes it possible for cultural goods to remain in a country if they are considered to be of outstanding national importance. The system is designed to strike a balance between the various interests concerned: the protection of the national heritage; the rights of the owner selling the goods and the exporter or overseas purchaser.

Clients who regularly move art across borders understand the importance of complying with import-export regulations and will normally seek advice before shipping works of art. They know that crossing borders can trigger tax liability but exemptions may be available. Clients exporting art from European countries may find that the export office is unwilling to issue an export license.

Where a license is not forthcoming, they may need to negotiate a solution with the relevant government department. Sometimes, clients may innocently infringe export regulations. Given that illegal export is an offence in many countries this may affect the resale value of an art work or an entire collection. It is important that a collector seek professional advice to guide them through the minefield of official documents, export licenses, and organize the most appropriate method of transport.

In the UK, Export control for cultural objects is managed by the Export Licensing Unit within the Arts Council. If you wish to take a cultural object out of its country of origin, the appropriate checks must be made. It is essential that you understand the implications of any legislation in the country of origin, and any intermediate countries, including export control. You have to ensure that taking the object out of the country will not be in violation of that legislation. Export restriction lists from other countries are not always easily obtained. UNESCO operates a database of cultural legislation around the world.

For cultural goods over certain age and monetary limits, an individual license is required for export from the UK to European Union destinations and non-EU destinations, with certain exceptions. There is both EU and UK legislation on the export control of cultural goods and either an EU or a UK license application may be required depending on the type of object and the destination to which you intend to export. Licenses may be required for both permanent and temporary exports, including when you are transferring your own property abroad. If you are intending to export a cultural object, regardless of its destination (within or outside the EU), you must apply for an individual license if your object is valued at or above a specified financial threshold.

International collectors must ask questions to avoid and ultimately prevent illicit activity in cultural property. It is important that you ask questions of whomever you are buying from whether an auction house, a dealer, a private owner or collector, someone selling via an online auction house or any other means. Buyers must also be confident that an object to be purchased has a certain provenance between 1933 and 1945 where particular issues of ownership arise as a result of the looting that took place in the Second World War and Holocaust Era.

Within the UK, there is national legislation that governs cultural property issues. The dealing in cultural objects (offences) Act 2003 is of primary importance. It makes an offence to deal dishonestly with tainted cultural property from anywhere in the world. It is essential that members of the trade in art, antiques and antiquities understand and comply with this legislation. Also important are the Theft Act 1968 (and in particular section 22, which relates to handling stolen goods), the Customs and Excise Management Act 1979 and export regulations. There is also international legislation governing the prevention of illicit trade and UNESCO has produced a Cultural Heritage Laws Database which is reliant on member states submitting their own national legislation to the database.

Understanding the export licensing restriction lists for other countries is essential in trading legitimately, but often very hard to do. The growth of freeports and customs bonded stores regulations have changed and you can now bring artworks into customs-approved fine art agents warehouses and enjoy the same tax benefits as freeports.

The continuing development of freeports in Europe and Asia has been another notable trend over the last few years in the movement of art across borders by HNW individuals.

Switzerland remains an important international centre of freeports for the storage of art. According to the TEFAF Art Market Report 2014 these have become increasingly important for wealthy collectors, offering secure warehousing, confidentiality and some tax advantages. As long as works are stored within the freeports, customs duties and taxes are suspended, and may continue to be so until the object is removed and sold or placed in its final destination. While this benefit is intended as a temporary exemption applying to goods in transit, it can be applied for an indefinite period, with art stored for decades without attracting any levies.

Art is also exempt from certain withholding, value added or capital-gains taxes while in storage. While these taxes may fall due in the destination country when an object leaves storage, it may in fact have changed hands several times in the interim. These exemptions have been valuable for collectors and institutions wishing to hold works until the point they feel it is advantageous to sell them in the market. Increasingly transactions and changes of ownership are carried out while the goods are stored and the freeports themselves have changed from being mere warehousing facilities to higher end exhibition centers where potential buyers can view art in person or online.

While new premises have opened in the last few years in Asia and Europe (most notably Singapore with a new freeport due to open in Luxembourg in 2014), the freeports located in Switzerland are among the oldest and most established. Although the value of art stored in these premises is not fully assessable, it is believed to be well in excess of the size of the annual global art trade.