As a result of the low-interest phase of recent years, alternative forms of investment in works of art have experienced increased popularity. The acquired art objects could often record a massive increase in value. If art objects are part of the estate or are to be transferred as a gift, inheritance or gift tax on them may force the taxpayer to sell these objects. This can be avoided by fulfilling the requirements for the privileged treatment of art objects and art collections, which we explain in this article.
General taxation of inheritances and gifts
If works of art are to be transferred as part of a disposition upon death or a gift, their value is generally subject to taxation in accordance with the Inheritance Tax and Gift Tax Act (ErbStG). As long as no tax allowances according to § 16 ErbStG are used, the acquisition is subject to taxes which, depending on the tax class of the acquirer, can rise up to 30 % (for tax class I; spouse and civil partner, children and stepchildren as well as their descendants and parents and forefathers in the case of acquisitions by reason of death) or 50 % for relatives of tax class III according to § 15 ErbStG.
Privileged treatment of art objects and collections
In § 13, the Inheritance Tax Act (ErbStG) provides for several tax exemptions to which works of art may be subject under the conditions contained therein.
1. Privileged status as “household effects” or “other movable tangible property” under § 13, para. 1, no. 1 ErbStG
According to § 13, para. 1, no. 1 a), household effects, including linen and clothing, remain tax-exempt when acquired by persons in tax class I, provided the total value does not exceed 41,000 Euros. Especially works of art that are within this value limit and do not exhaust it as a single item can be transferred as part of the home furnishings and then not be subject to taxation.
In addition, works of art may be transferred as other movable tangible property under § 13 para. 1 no. 1 p. 1 b) Inheritance Tax Act (ErbStG) with a value of up to 12,000 euros to persons of tax class I.
For persons of tax class II and III, the value limit under § 13, para. 1, no. 1, sentence 1 c) of household effects and other movable tangible property is 12,000 euros in total.
The tax exemptions take effect individually for each taxpayer, which is why they can be exhausted anew in each case when dividing the transfer of the art collection among several persons.
2. Privileged treatment of art objects under § 13, para. 1, no. 2, sentence 1 ErbStG
a) Tax exemption of 60 % according to § 13 para. 1 no. 2 p. 1 a) ErbStG
A special privilege for works of art and art collections is provided for in § 13, para. 1, no. 2, sentence 1, ErbStG, insofar as their preservation is made accessible to a public interest. For these, a tax exemption of 60 %, or even a full tax exemption if additional conditions are met, can be achieved.
According to § 13 para. 1 no. 2 sentence 1 a) ErbStG, the prerequisite for a tax exemption of 60 % of the assessed value is that
- the preservation of these objects is in the public interest because of their importance for art, history or science,
- the annual costs generally exceed the income generated, and
- the objects are or will be used for the purposes of research or public education to an extent appropriate to the circumstances.
These conditions must be fulfilled cumulatively.
- A public interest in the preservation of the work of art is already to be assumed if they could achieve a high market price at the time of the relevant valuation.
- Secondly, the costs of maintaining the work of art (including storage, restoration and insurance) must be higher than the income generated by it, for example through renting or licensing.
- Thirdly, according to a ruling of the Federal Fiscal Court (Bundesfinanzhof, BFH) in 2016 (BFH, decision of 12 May 2016 – II R 56/14), the necessary utilisation for the purposes of research or public education can be achieved in particular by concluding a cooperation or loan agreement on the exhibition of the work with a relevant museum.
b) Tax exemption of 100% according to 13 para. 1 no. 2 p. 1 b) ErbStG
A further full tax exemption of the acquisition of the works can be achieved pursuant to § 13 para. 1 no. 2 p. 1 b) if in addition
- the taxpayer is willing to subject the objects to the applicable regulations on the preservation of historical objects, and
- the objects have been in the possession of the family for at least 20 years or have been entered in a register of nationally valuable cultural property pursuant to § 7, para. 1 of the Cultural Property Protection Act of 31 July 2016 (BGBl. I p. 1914), as amended.
aa) the willingness of the taxpayer to subject the works of art to the applicable provisions on the preservation of historical objects is, according to the jurisprudence of the BFH, a subjective characteristic that can be inferred based on objective circumstances. A declaration to the competent authority for the preservation of historical objects or the conclusion of a loan and cooperation agreement with a professionally relevant museum can have an indicative effect on the willingness to do so.
bb) the objects of art must also have been in the family for at least 20 years or be entered in a register of nationally valuable cultural property. To prove that the objects have been in the possession of the family for 20 years, corresponding receipts of the acquisition should be kept and adequately documented.
For the conditions of the tax exemption for works of art to apply, these must be achieved in a time frame connected to the acquisition. For this purpose, the conclusion of a loan and cooperation agreement with a museum within 6 months of the acquisition is timely.
c) No subsequent lapse of privilege due to resale or failure to meet the requirements within 10 years
The privilege is linked to the condition that its requirements are maintained for a period of 10 years. According to § 13 para. 1 no. 2 sentence 2 ErbStG, the tax exemption ceases to apply with effect for the past if the objects are sold within 10 years of acquisition or the prerequisites for the tax exemption cease to apply within this period. The date of acquisition is the date that was used as the cut-off date for the inheritance tax determination. A subsequent succession occurring later is not to be regarded as a “sale”. The discontinuation of the conditions is to be assessed separately for each object subject to the privilege and only affects this object in each case.
Alternatively, a reduction of the tax burden can be achieved by placing the art objects in a foundation. Furthermore, the tax liability can be eliminated according to § 224a of the German Fiscal Code (AO) by donating art objects in lieu of payment.
In view of these structuring options, we would be pleased to help you find the most tax-efficient solution for planning your estate or preparing other asset transfers. Please feel free to contact us for legal advice specifically tailored to your needs!