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Fine art collecting and wealth protection

News Fidinam Hong Kong

On June 1, 2022, Fidinam and MASSIMODECARLO Gallery proudly hosted the first event of the series 'Alternative Assets Investment' focused on Fine Art.

 

Surrounded by "The Extinction Agenda", the first solo exhibition in Hong Kong by the acclaimed American artist Sanford Biggers, Fidinam had the privilege to welcome professionals from MASSIMODECARLO gallery who shared precious insights on the Fine Art market and how to invest in it, while our experts provided an overview on structures to protect the assets and tax implications.

Marta Giordano, Managing Director at Fidinam Singapore, and Riccardo Chesti, Sales Associate at MASSIMODECARLO Hong Kong, share some insight of the talk.

For centuries humanity has struggled to confer a proper definition of art. Because of its multi-faceted and subjective nature, the concept of art has widely changed over time, with several rationales and associations gaining prominence.

Nowadays, the investment consideration beyond the aesthetic dimension of artworks is also becoming increasingly important. Art collectibles have become an integral part of wealth planning strategy in the last decade. This is where Art meets Finance, a promising and innovative industry.

The pandemic appears to have affected and even more intensified the industry's polarized nature, by strengthening the position of businesses whose buyers have enjoyed a greater degree of insulation from the cultural and economic traumas of COVID-19.

The challenges and restrictions of attending exhibitions and major art events have led galleries and auction houses to develop new technological tools to engage and connect with collectors. Digital art fairs, online viewing rooms ('OVR') and easy-to-share e-catalogues proved indispensable to boosting selling strategies.

While in the pre-pandemic years the most common method of accessing galleries and auction houses' sales was through their physical premises, the shift to online strategies initiated by the major art galleries as well as the most recognized institutions in the industry (such as art fairs, foundations and museums) has been welcomed by the public. Buying through e-channels was the most widely used in 2020 and 2021.

The aggregate results for 2021 denote the incredible resilience of the art market. Galleries and auction houses posted a strong uplift in sales, despite lingering restrictions and continued cancellations of events during the year, making up for the losses of 2020 and bringing the market back to just above pre-pandemic levels. The strong sales at the high end of the market drove the growth, as the rising wealth of the High-Net-Worth ('HNW') and Ultra-High-Net-Worth ('UHNW') collectors supported demand, and the more buoyant market encouraged vendors.

Collectors have become more comfortable with buying online, and there has been a successful shift of campaigns into the digital sphere by galleries and dealers, including improving the functionality of websites and platforms, which has enabled better experiences of transacting online. Thanks to this new way of conducting business, the global art market showed a quicker recovery than most other luxury industries, keeping the relationships between collectors, galleries and institutions alive.

In this scenario, the post-pandemic art world seems to be healthier than ever before, defining itself along two parallel tracks, with top-tier galleries bringing forward an international program thanks to the improvements of their e-sales tools and second-tier ones adapting their programs to a more regional audience to satisfy the public's desire to enjoy art in person.

The mature European and American markets have shown stable growth over the years and are appealing to artists and collectors. On a global scale, New York retains the prominent position with Sotheby's, Christie's and Phillips global auction sales. However, investors are increasingly attracted by the eastern clout, as Asia is offering new opportunities to both newcomers and established investors. Among others, Hong Kong stands out with a series of record-setting auctions that conferred this market the second position globally. This has also brought new developments and acceleration in the region's fine art industry.

In China, despite the challenges, collectors were even more active in investing in contemporary art than in pre-pandemic years. The major annual art fairs, such as Westbound 2021 or Art021, have shown that the value of spending by HNW collectors has increased substantially in 2021 and contributed to the emergence of a dynamic new generation of collectors.

At the same time, the raising of new realities in the Asian contemporary art landscape - like South Korea - pushed the specialized audience's interest toward this fairly new market. In September, Seoul will host the first edition of Frieze, the International contemporary art fair that competes with Art Basel for the lead in the market.

In recent years, Korean collectors conquered a significant role in the sector by investing in both emerging artists and well-established names. The art stakeholders, therefore, look with interest at Seoul, wondering if it will ever be able to compete with Hong Kong, which has acted as the key hub for regional and international trade in Asia for over a decade.

fine art collection

Interestingly, the art market shows how wealth creation has not been limited by the restrictive measures implemented by governments against the pandemic. Consequently, the hike of high-net-worth individuals and concentration of wealth could trigger new interest and demand for diversified investments.

Among alternative assets, art is increasingly assuming a twin role by embodying the identity of a family and the opportunity for returns and diversification. Recent events have confirmed there is a relevant potential for art to be integrated into a family's wealth planning with the aim of both preservation and enhancement.

Especially in periods of high inflation, tangible assets like art collectibles can offer investors protection and hedge while diversifying their portfolios. The tendency for some collectors to stick with artists they already know is tied to the amount of risk they are willing to tolerate in their collecting activities.

In this scenario, purchasing a mix of emerging artists alongside well-established ones contributes to maintaining a fairly balanced portfolio of art investment and a unique collection, which may even see a boost in value, that is able to react quickly to the ever-changing market conditions.

As art collections are well-planned long-term projects where nothing is random or chaotic, a greater emphasis should be put on buying from the primary market instead of reselling artworks on the secondary one driven just by short-term returns. Hence, the galleries', artists' and collectors' goal of keeping the market stable over the years, can be met by building reliable relationships. This allows investors to access the art world and galleries and protect themselves from a speculative market by limiting access to high-end works to 'untrustworthy' collectors.

To foster the collector-gallery bond, professional art advisors collaborate with private wealth consultants to prepare bespoke investment proposals and align the interests of both parties.

Over the last ten years, the need for a range of required services has expanded along with asset protection and planning.

Tax matters have become of central importance to all the agents of the art sector, including artists, cultural institutions, and financial stakeholders. Regardless of the point of view in the transaction, tax duties are not negligible when investing in art. This is particularly true when considering indirect taxes, whose approach and strategy can differ based on the nature of the seller, the purchaser, the intrinsic features of the artwork, and the physical movements.

No matter one's perspective on art, tax duties can have different effects on art stakeholders, but the relevance is familiar to every actor in the market.

Taxation can also have a bright side from the collectors' point of view, as they can enjoy tax advantages related to charitable investments. In some jurisdictions, artworks can be used for the payment of taxes in lieu. Taxes are also crucial considering the financial risk they may raise, such as in the case of inheritance and income taxes.

Indeed, introducing a standardized structure for the application of customs and VAT regulations to artworks is rather complex.

However, art collectibles often enjoy exemptions along with several tax duties. In both Hong Kong and Singapore, capital gains from the sale of assets are not subject to any taxation, and inheritance and gift taxes are also waived.

Furthermore, art donations from individuals and corporations in Singapore are deductible for 2.5 times their value. The scope of exemptions is even wider for structures with charitable or non-profit purposes, allowing for a complete waiver of tax burdens.

Attentive wealth management also entails asset protection, especially in the case of artworks where the role of intermediaries is central. From this perspective, art holdings can be professionally managed through tailored structuring for tax efficiency. Artworks can be segregated under structures such as a Single Family Office and Variable Capital Company (VCC) or a Special Purpose Vehicle (SPV), thus providing an effective safeguard from hostile claims.

Today, art finance is an established source of liquidity for many collectors worldwide, whose acquisitions represent a significant element of their wealth. As such, they need to consider how to develop their collections per sé and how to structure their ownership. 

Collection management is an all-embracing term for several aspects of arts and collectible caretaking. It involves corporate/wealth management services around ownership, and tax and estate planning. Besides, it requires galleries to provide their expertise not only limited to the buying and selling of art but also regarding conservation, exhibition, shipping and storage considerations. A good administration strategy is the foundation of a quality collection, ensuring its cultural and financial value remains preserved.

Fidinam has over 60 years of experience in advising individuals and families on how to protect their wealth and to pass it to future generations.

Contact us now for more information: info@fidinamgw.com or fill in the form below.

To contact MASSIMODECARLO Gallery, please reach out to Riccardo Chesti at chesti@massimodecarlo.com.

Photos: MASSIMODECARLO and the artist. Credits: Michele Galeotto.

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