When the Ivory Act 2018 (“the Act”) comes into force, the UK’s restrictions on the trade of ivory will be among the strictest in the world. The prospect of formerly valuable antiques becoming unsaleable presents urgent practical and tax considerations for owners and dealers of ivory objects. UK government publications have suggested that the Act will come into force in late 2019, although an alliance of antiques dealers and collectors have recently been granted permission to challenge the Act’s legality in the High Court first.
In brief, buying, selling or hiring objects made of or containing elephant ivory will be an offence under the Act unless the object qualifies for one of a small number of statutory exemptions. The exemptions are for pre-1918 objects of ‘outstandingly high artistic, cultural or historical value’; pre-1918 portrait miniatures; pre-1975 musical instruments of which less than 20% is ivory; and pre-1947 ‘worked’ objects of which less than 10% is ivory. There is also an exemption for dealings by accredited museums.
HMRC has not yet confirmed its approach to the valuation of ivory objects once the Act has come into force. But assuming HMRC agrees that non-exempt ivory objects are of nil value, since they cannot be sold, no IHT would arise on the objects upon the owner’s death. It is difficult to conceive of a convincing argument that a non-exempt ivory object has any market value once it is illegal to sell. Objects of nil value could also be settled on trust without any charge to inheritance tax, and in doing so would allow the owner to retain some control over the integrity and (non-commercial) use of their collection of ivory objects in the longer term without adverse tax consequences.
It should be noted that if an owner of non-exempt ivory objects were to die before the Act came into force, inheritance tax would be charged on the objects’ open market value at the date of death, with no discount or tapering to take into account the impending operation of the Act. Once the Act has come into force, the estate could be left out of pocket from having to pay inheritance tax on the former value of then unsaleable objects.
Capital Gains Tax
Upon the Act coming into force, owners of non-exempt ivory objects will incur a loss equal to the objects’ acquisition value (or their value at 31 March 1982, if later). However, that loss will not be available as an ‘allowable loss’ to set against any other CGT liability unless the taxpayer ‘crystallises’ the loss by triggering a CGT ‘disposal’. Allowable losses could then be set against any gains made on disposals during the same year, so that the taxpayer only pays CGT on the net gain.
Making a gift of the non-exempt object (for no consideration) would count as a disposal (and would not infringe the prohibition in the Act), but if the gift were to a connected person (including relatives, trustees, or companies of which the donor has control) the loss could only be set against CGT liabilities arising on other disposals to the same recipient. A more attractive alternative might be, if HMRC were to agree a non-exempt ivory object were worth ‘next to nothing’, to make a ‘negligible value’ claim. This would mean the taxpayer would be deemed to have disposed of the object (despite actually retaining it), giving rise to an allowable loss of the object’s former open market value. Such losses could then be set against any taxable gains in that or future years. Only time will tell if HMRC will allow such claims, but if so, then this could side-step some of the tax issues arising from the Act.
Companies can set allowable losses against their liability to Corporation Tax. After the implementation of the Act, a company holding a non-exempt ivory object as trading stock could ‘appropriate’ it for another purpose – such as for the owner’s private use. This re-purposing would be deemed to be a disposal at open market value, albeit that the object had not changed hands. If, as before, the market value for the unsaleable non-exempt object is assumed to be nil, an allowable loss would arise. There must be clear evidence of an appropriation, such as by way of a resolution and in the company’s accounts.
If an allowable loss for CGT or Corporation Tax purposes is likely to be of use to an owner of non-exempt ivory objects, it would seem sensible to ensure that evidence of the acquisition cost or value is available to calculate this. The insurance arrangements in place over non-exempt ivory objects should also be revisited after the Act comes into force, given that in practical terms, the objects will be likely to be of nil value.
Owners of ivory objects which will be unsaleable after the Act comes into force should take steps to realise their value now. Owners in this position might wish to sell non-exempt ivory objects, but subject to current CITES regulations and possibly a market glut for ivory objects prompted by the impending changes. As the Act’s prohibition on selling non-exempt ivory objects is not restricted to the UK, it will not be possible to export objects abroad now in order to sell them in a more favourable jurisdiction after the implementation of the Act.
The most drastic course of action would be to alter or refurbish objects which have ‘incidental’ ivory elements, in order to remove them from the purview of the Act entirely. Otherwise, those who wish to retain non-exempt ivory objects for the foreseeable future, and who are content to transfer ownership of them only by gift or bequest, need take no further action.
In light of the Act’s overarching purpose and general public sentiment around the ivory trade, it seems unlikely the exemptions will be interpreted generously. Furthermore, in May 2019 the UK government launched a consultation about extending the prohibition to non-elephant ivory, from animals such as whales, hippopotamuses, warthogs and mammoths. For those potentially affected, it would seem prudent to take tax advice sooner rather than later, given the uncertainty over when the Act will come into force and the significant changes it will bring about.
Suzanne Marriott is a partner at Charles Russell Speechlys LLP who specialises in UK tax planning, trusts, estate and succession planning. Louise Paterson is currently a trainee solictor in the firm’s Private Client Department