New rules open up pensions as a source for art investment

Under the simplification of pensions legislation, scheduled to come into effect in April 2006, people with a personal pension scheme will be able to invest in a new range of assets which includes not only residential property but also paintings, antiques and fine wines.

It is not unknown for large corporate providers, such as the British Rail Pension Fund, to invest in the art market, but the measures being introduced will mainly apply to self-invested personal pensions (SIPPs).

Individuals in participating schemes will be able to buy works of art and place them in their personal pension portfolio. They will also be able to allocate resources from their pension into larger art investment funds.
How much say an individual will have about which art their pension scheme manager invests in is not yet clear.

But Ian Smith, director of independent financial advisors Central Financial Planning, said: “In theory, you could identify what you want to buy and then go to an auction house with a cheque from your pension fund.”
Incentives will include offsetting the initial purchase against tax and paying no capital gains tax on the re-sale.

Personal use
However, tax will apply for any ‘personal use’ of an asset purchased through a pension scheme. In other words, you can buy a painting, but you must pay tax if you hang it on your wall. Tax won’t apply, though, if the work is kept in a bank vault or loaned to a museum. Likewise, investing in a residential property, for instance, will be taxable if the property is used non-commercially (ie. to live in rather than rent out). The rate of this tax is, as yet, unset.

Another benefit is that pension scheme assets are not included in an individual’s estate, so they are not liable to inheritance tax.

The pension rule changes follow this year’s budget in March and the Finance Bill in April, which confirmed the introduction of a single tax regime and a single set of investment rules for pensions.

The result is likely to be more money flowing into the art market, with more dealers giving investment advice.

“It could well lead to substantially more money coming into art,” said Ian Smith, “but it as yet unclear how many schemes will offer this opportunity to their clients. Many pension schemes may be unwilling to look into investing in these niche markets. I expect those who will take up this option will mostly be people already interested in the art market.”

Buying art and antiques through personal pension funds, however, will be restricted by the limits set on pensions funds.

From April 2006, the value of an individual’s pension, including occupational pensions, will be subject to a lifetime limit of £1.5m.

Any excess will be taxed when the benefits are taken (55 per cent where the excess is taken as cash, and 25 per cent when taken as a pension).

Valuers may find their expertise in greater demand as companies running personal pension schemes are likely to demand at least two recorded valuations before allowing an asset to be included in a pension portfolio. Those considering using their pension fund to invest in art may also require professional investment advice, perhaps engaging dealers and auctioneers.

Art advisers are unlikely to be regulated by the Financial Services Act in line with advisers in industries such as property investment.