Investments in fine wines, vintage cars and whiskey are becoming more popular due to the tax advantages. The capital gains tax reliefs which may apply can result in a large tax saving, but are these investments really as attractive as they seem?
Capital gains tax on investments
Generally capital gains tax (CGT) is payable on the increase in value on relevant assets. We often see this on share portfolios with the capital gain being taxable in the event of a disposal.
Whether you pay CGT or not depends on the nature of the asset being sold; there are some assets which are exempt from the tax.
Assets which are considered to have a useful life of less than 50 years are exempt from CGT, these are known as “wasting chattels”.
Tangible movable assets with a useful life exceeding 50 years are referred to as non-wasting chattels. These are subject to CGT only if the asset is worth £6,000 or more (unless you are selling a set).
Some examples of wasting and non-wasting chattels are set out below:
Wasting Chattels | Non-wasting Chattels |
Cars Racehorses Yachts Clocks / watches
| Jewellery Painting/ artwork |
In most cases you would expect the value of wasting chattels to decrease over time. There are, of course, exceptions to this, for example, classic cars and vintage watches will often retain value or can even increase in value over time.
Attractive Investment Opportunities?
These rules have left many investors looking to take advantage of investing in exempt assets and has led to the rise of investing in classic cars, fine wine, and artwork.
Many are lured in by promises of tax-free gains however the rules on this can be more convoluted than some of the advertisements claim.
Classic Cars
Classic cars are becoming an increasingly popular choice for investors, rising to prominence in the last 50 years. Part of the reason for this is due to their status of being a wasting chattel, meaning that no CGT is due on gains made when classic cars are sold.
A recent high-profile sale was made where a 1955 Mercedes-Benz 300 SLR Uhlenhaut Coupe fetched an eye watering £114 million at auction in Stuttgart, Germany. A very decent tax-free gain!
With CGT free status, this means that it isn’t possible to claim a capital loss for tax purposes if you were to lose money on a car. This is not good news for petrol heads wishing to take their classic cars for a spin, as a crash means you cannot claim tax relief on a loss.
Alcohol
Scottish whiskey in particular has boomed, with the premiumisation and global appeal leading to many new distilleries being set up across Scotland.
Many wine investing sites advertise such investments as tax free. The CGT rules on wine and liquor are not as black and white as this, and such claims are too good to be true in many cases.
For wine, whether it can be classed as a wasting chattel, can cause some issue. Most wines will need to be consumed within 50 years but this is not the case for fortified wine, which can have a shelf life exceeding 50 years.
Similarly, the rules surrounding whiskey are not straight forward. The tax treatment will depend on how the whiskey is stored. Whiskey that is stored in a cask is a wasting chattel because over time the whiskey seeps into the wood and evaporates, resulting in a useful life of less than 50 years. Whiskey stored in a bottle on the other hand is classed as a non-wasting chattel as this is capable of lasting for a period far longer than 50 years.
It is therefore important to understand the distinction between these assets as the tax consequences could be substantial.
Artwork
Another potential investment to consider is art. This is simpler in its classification as it is deemed a non-wasting chattel in almost all cases. The value of the artwork will therefore determine whether or not it is subject to CGT.
Further complications arise if you were to sell multiple items to the same buyer, HMRC may deem this to be a set. This means the total value of all assets sold will be added together which may then exceed £3,000 and result in the seller being liable to CGT.
A planning point for a married couple purchasing a non-wasting chattel is to purchase jointly so that if combined consideration is less than £6,000, no CGT will arise due to the proceeds not exceeding £3,000 each.
What about other taxes?
It is also important to consider other taxes which may be relevant. Even though wasting chattels are exempt from CGT, other tax charges could unexpectedly apply to these investments.
Frequently repeating these types of investments may be seen by HMRC as a trading activity which could then be subject to Income Tax and National Insurance. If there is a trading activity VAT may also need to be considered.
There is also a potential Inheritance Tax (“IHT”) hit which many investors may not anticipate as all assets are considered in the death Estate. Wines and wine cellars will be deemed to be part of an individual’s Estate upon their death and will be subject to IHT.
Tax planning
From this it can be clear to see that ‘CGT free’ investments include much more than meets the eye and due care must be undertaken when considering investing in such assets.
As is the case with more conventional investments, the value of these assets can go up or down, and if the investment is exempt from CGT, this will mean that investors are not able to bank any valuable capital losses to set against future capital gains.
As with everything in tax, the future is unknown as to what the rules may be in regard to future CGT on such assets, especially with a new government.
If you wish to seek more guidance on CGT, we have a range of tax experts who can guide you on the relevant tax implications of your existing or potential future investments.
