As the ‘great wealth transfer’ gets underway, what are the current inheritance tax rules?

The flood of material from the estates of deceased collectors sold in New York’s November auctions looks set to become the norm in years to come, as the demographic bulge of the acquisitive Baby Boomer generation passes away.

“We are still in the early days of the so-called great wealth transfer,” says the lawyer Pierre Valentin, the joint head of art law at Fieldfisher. “The wave started in the US with the sale of collections such as those of Sydell Miller, Mica Ertegun and more recently, Leonard Lauder. The wave is coming to Europe, for example with the auction of the collection of Pauline Karpidas [last] September. I expect that there will be many more of those ‘white glove’ sales in the next 10 to 15 years because younger collectors collect differently from their parents and grandparents.”

Inheritance tax (IHT) also triggers these sell-offs. But what exactly is the IHT regime in the UK and US?

The situation in the US

Mari-Claudia Jiménez was the chair and president of Sotheby’s Americas and head of global business development until 2025. She is now a partner and global co-head of art law practice at Withers, where much of her work revolves around estate planning.

In the US, she says, estate taxes can be imposed at both the federal and state level. Each person is allotted a lifetime exemption from estate and gift taxes (currently set at $13.99m per person or $27.98m per married couple, though this amount is set to go up to $15m per person or $30m per married couple this year). Up to 40% tax is charged on the estate’s value over this threshold. On top of the federal tax, a few states impose their own “inheritance taxes” (tax charged to the beneficiaries on assets received): Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. But a number of other states, including New York, have a separate estate tax with their own thresholds and rates. “Depending on where you live, if you’re a New York collector, for example, you may have to pay a New York estate tax and a federal estate tax of 40% above your lifetime exemption amount remaining at your death,” Jiménez says.

Capital gains tax (CGT) is a different layer, she says. “It usually only applies when a beneficiary sells an inherited asset for more than its value as of the descendant’s date of death. In the US, we have what is called a ‘step-up in basis’ where the beneficiary’s cost basis is reset to the asset’s fair market value at the date of the descendant’s death. That means that if a beneficiary decides to sell an inherited artwork, CGT is generally only charged here on the amount of appreciation after the inheritance, not on all of the gain since the original purchase.”

Preserving a legacy while reducing the burden on their children is the main concern of most collectors, Jiménez says, but “more often than not, sadly, the kids can’t afford to keep the collection—or in some cases just don’t want it—because it’s impossible to be able to pay the estate tax obligations and keep the collection”.

Getting a valuation of a collection is the first step in estate planning. But be prepared that the value may have gone down. “Sadly, we see this a lot,” Jiménez says. “There are clients who bought really aggressively in the early 1980s—French furniture, Impressionist paintings, Old Master paintings, silver… they’re assuming these things are still worth the same now, but in the case of ‘brown furniture’, it’s often worth a tenth of what was once paid for it.” But on the flip side, she says, “I’ve worked with clients who will say, ‘My collection is worth $100m’ and then it’s worth many times that.”

A recent valuation is also paramount due to the “step-up in basis”. “So, if you bought a Basquiat for $2,000 in 1982 and it’s appraised at $140m when you die, then whoever inherits does so at a tax value of $140m,” Jiménez says. “But if it sells for $200m, then the beneficiary is going to have to pay CGT only on the $60m of appreciation above that date of death tax value.” Therefore, if the valuation on an estate is artificially low to lessen the estate tax, it can backfire, as the Internal Revenue Service (IRS) may challenge the value, and the heirs would then ultimately face both additional estate taxes and a high CGT when they sell.

As overloaded museums become more selective of gifts, more collectors are investigating creating their own museums. That, however, is a huge investment. “It requires an enormous endowment in terms of not just giving the collection, but funding the museum too, in perpetuity,” Jiménez says. She points to the recent case of Rosa de la Cruz, a collector who created her own museum in Miami in 2009. She died in February 2024, the museum was closed in March that year and her husband, Carlos, sold off the collection. He told the Miami Herald that the museum was Rosa’s “baby” and the works were being sold to pay taxes and operating costs. As Jiménez says, “It’s a sad and cautionary tale about how what you want isn’t necessarily what your heirs want.” Indeed, the children of voracious collectors can sometimes be resentful. “They say, ‘This was an obsession for so long, it took time away from me, I’m over it.’”

The situation in the UK

Wendy Philips, the former UK head of tax and heritage at Sotheby’s, is now a partner at the cultural property advisers Tennant McQuillan. “What really distinguishes the US from the UK is that, broadly, important UK collections fall into two groups,” she says. “There are inherited collections—say, within a stately home—where the owners see themselves as custodians during their lifetimes. Because of the system of primogeniture that tends to be applied in the UK, often everything goes to one child and they will try to do everything not to have to sell objects on a generational transfer.”

With the second group, it tends to be quite a different approach, Philips says, when the person who has died is the person who has put that collection together—something more common in the US, but of course it happens in the UK. “There’s unlikely to be a primogeniture situation, and if there is more than one child, the estate’s going to be split,” she says. “In that situation, the heirs may opt for a single owner sale, particularly when one or two works are far more valuable than everything else and it’s difficult to allocate to a single beneficiary.”

In the UK, far more families will be subject to IHT, as the tax-free threshold is £325,000, plus an additional £175,000 if the parent passes on their main home to a direct descendant, after which 40% IHT is due (the tax-free allowance can be passed on between married partners, as in the US). Most gifts made more than seven years before death are also free of IHT. Executors must value the estate, report it to His Majesty’s Revenue and Customs (HMRC) and pay the IHT. The recent UK budget last November did not make any major changes to IHT, though in the 2024 budget business property relief was capped at £1m, which impacts some art businesses (such as galleries and artist estates) where works of art are classed as being part of the business. Having previously paid no IHT, they will have to pay 40% above the £1m threshold from April 2026. The acceptance in lieu scheme (giving a work of art to the nation in lieu of tax) and conditional exemption (which defers IHT if a heritage asset such as a work of art or historic house is not sold and the public are allowed access to it) are frequently used by Philips and her clients to mitigate tax bills.

“Often you do a bit of a pick and mix… some conditional exemption, some tax to pay, and an offer in lieu of inheritance tax,” Philips says. “The helpful thing with chattels is that you can do a smorgasbord approach, because you are dealing with multiple assets.” Philips has seen a slight interest in lifetime gifting of assets, but cautions: “It’s always a mistake to rush ahead and make significant gifts to the next generation if it’s not the appropriate thing to do, but if it’s something you’re planning to do anyway, then you would probably want to get on and do it.”

Another option available is for a parent, for example, to give their collection away to a child before they die (if the parent wants to keep it in their home, they must pay a fair market rent to the child). “It’s a difficult area—it used to happen a lot more,” Philips says. “You’re making a disposal, so you have to pay CGT—now at 24%—on the gain [increase in value since acquisition]. So that puts people off.” However, lifetime gifting is more common with lower value items thanks to the small chattels exemption whereby, if it is worth £6,000 or less, no CGT is due.

Sometimes a collector will choose to do a sale of their collection in their own lifetime, Philips says, “because they want to enjoy it”, pointing to the Pauline Karpidas sale at Sotheby’s in London last September. “I can see single-owner sales increasing… they’re an efficient and lucrative way of selling things.” Of course, for a UK tax resident, CGT is due on any gains made in lifetime single owner sales, but they can still be tax efficient if you give the proceeds to your beneficiaries and live for seven years or more, therefore just paying 24% CGT on the gain, not 40% IHT on everything. However: die before the seven years is up and you can end up with a higher tax bill than if you had done nothing.

The situation in France

Inheritance tax in France (droits de succession) applies to all assets transferred on death, including art and antiques, says Antoine Gabizon, the head of the tax department at Fieldfisher’s Paris office. “The tax is assessed per beneficiary, not on the estate as a whole, and rates vary by relationship: children pay between 5% and 45%, while unrelated heirs can face rates up to 60%,” Gabizon says. Each child has a €100,000 tax-free allowance, while spouses or civil partners are fully exempt.

Unlike the UK or US, forced heirship rules apply in France, whereby a fixed share of the estate passes to children regardless of their parents’ wishes. “This can complicate plans to keep a collection intact or donate it to an institution,” Gabizon says. He adds that while “tools such as inter vivos gifts, and usufruct arrangements [whereby, for instance, a child legally owns a work while their parents can still live with it] can mitigate tax exposure, artworks themselves do not enjoy preferential treatment under current IHT rules.”

Like HMRC, French tax authorities are increasingly watchful of art valuations within estates. “Notaires must provide detailed inventories, and the administration can challenge declared values using auction data or expert appraisals,” Gabizon says, adding that a surcharge of up to 40% can be charged for deliberate understatement of value. He advises maintaining provenance records and getting a professional valuation to avoid disputes.

While not directly related to IHT, the French Parliament has been debating a reform to replace the real estate wealth tax (IFI) with a broader tax on “unproductive wealth”, which could include art, antiques, and collectibles. While this would be an annual wealth tax, the inclusion of art may influence estate planning behaviour, Gabizon says: “Collectors might accelerate sales, donations, or museum loans to reduce exposure.” It also adds complexity, as collectors will have to consider both IHT and wealth tax considerations in their estate planning. “If enacted, expect increased use of public-access exemptions, philanthropic structures, and possibly relocation of high-value works,” Gabizon says.

Schemes like dation en paiement and charitable donations are gaining attention as the great wealth transfer gets underway, Gabizon says. Similar to the acceptance in lieu scheme in the UK, dation en paiement allows taxpayers to “settle inheritance, gift, or wealth tax by transferring artworks or objects of high artistic or historical value to the State,” Gabizon says. However, he adds, “approvals are selective, focusing on works that enrich national collections.”

Gabizon advises collectors to “view their art holdings as a strategic asset class within their overall wealth plan.” Key to this are: keeping up to date records and valuations; considering family holding entities (such as tailored corporate vehicles for art), or philanthropic structures such as fonds de dotation or foundations to hold collections; lifetime gifting, and charitable donations.

Whether sold before or after a death, Jiménez foresees trillions of dollars of art hitting the market in the next decade, with the billion-dollar estate sale becoming the norm. “When I started at Sotheby’s in 2016, a $100m sale was a meaningful one… now, you don’t even really blink much at a $100m,” she says.

Whether the art market can absorb it all is the big question. Valentin thinks it will adapt, although he predicts social media will shape tastes: “‘Does the algorithm like it?’ is a question I hear increasingly these days. At first, I was baffled but I think that we have entered the age of ‘the algorithm’. What that does for Old Masters, Impressionism and the decorative arts remains to be seen.”