Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about taxing a valuable image painted on a main residence, such as artwork by Banksy.
‘I was intrigued by the story of the property owner who woke up one morning to find that the side wall of her house had been painted by the world-famous artist, Banksy.
I would not want to get too caught up in the aspects of that particular case, but does it give rise to potential tax implications because it seems that Banksy does paint on various public and private properties.
Let’s say that someone has lived for many years in a property that is their main residence. The property is for sale, but a Banksy painting appears on the wall of the house meaning that the value of the property is substantially increased.
Assuming the property sells for that increased value, is there a capital gains tax liability on part of the sale proceeds or is the whole amount exempt under TCGA 1992, s 222? What is being sold here – a dwelling house or a dwelling house and a piece of art? If the latter, might the excess be liable to income tax rather than capital gains tax? Could VAT apply as a trading transaction? And what might happen if, say, the plaster on which the image was painted was removed and sold separately? Is that now just a taxable painting or is it still part of an exempt main residence?
Thinking about it, can the painting scenario be compared with, say, a property with a large garden that is granted planning permission for more houses to be built on the plot?
We can but dream and I suppose the chances of one of my clients finding a Banksy on their property are slim, but I would be interested in the thoughts of Taxation readers.’ Query 19,684 – Art.
Terry Jordan’s reply: The owner will not be considered to have been carrying out a trade.
‘As a general proposition, works undertaken on the property of another person accrue for the benefit of the property owner. ‘Equity follows the law’ so the starting point is that the Banksy belongs to the homeowner.
That presumption can be overturned by establishing a constructive trust or by proprietary estoppel, neither of which would apparently be in point here.
Only or main residence relief under TCGA 1992, s 222 applies to the disposal of, or of an interest in, a dwelling-house. The chattel exemption in TCGA 1992, s 262 applies to ‘tangible moveable property’, a similar definition to that in the current version of the Administration of Estates Act 1925, s 55(1)(x) as amended in respect of wills and codicils executed after 30 September 2014; the previous version having been more extensive and specifically including the term ‘pictures’.
From what we have been told, there seems little danger that in the hands of the property owner the Banksy could be categorised as an adventure or concern in the nature of a trade, especially as it was unsolicited. Apart perhaps from (ii) the six badges of trade: (i) the subject matter of the realisation; (ii) length of period of ownership; (iii) frequency or number of similar transactions; (iv) supplementary work on assets sold; (v) reason for sale; and (vi) motive, do not apparently present any problems. Accordingly, the proceeds should be safe from any charge to income tax.
On my analysis, if the Banksy is sold with the property the entire gain will be relieved.
If it is removed pre-sale the analysis would be different because it would then be a chattel with zero base cost and a chargeable gain would accrue to the disposer.
The Sunday Times of 10 January 2021 carried a ‘Fame and Fortune’ feature on Jeremy Rainbird. Banksy did a painting on his office wall in 2002 that was subsequently carefully removed. A second one was found behind a filing cabinet – a rat with a drill – and it was also removed and sold.
The artist’s resale right (ARR) has survived Brexit if a sale is through an auction house or an art market professional.’
The article is also available on the Taxation website, including other responses to this query:
- The applicable tax will depend on whether the assets are sold separately
- Removing the painting for separate sale would lose main residence relief
For more information, please get in touch with your usual BKL contact or use our enquiry form.