Investing in assets, such as fine wines, classic cars, and vintage wines or whiskey is gaining popularity due to the tax advantages. The capital gains tax (CGT) reliefs which may apply can make these investments seem highly appealing due to the large tax savings. But are they as attractive as they seem?
Understanding CGT on your investments
CGT is typically applied to the increased profit made from selling certain assets, such as shares and property. However, some assets are exempt, meaning their sale does not incur CGT.
Assets classified as “wasted chattels,” i.e., assets with a lifespan of less than 50 years, are exempt for CGT. However, assets with an expected lifespan of more than 50 years, or “non-wasting chattels,” are subject to CGT and only taxable if sold for more than £6,000, unless sold as part of a set.
While many wasting chattels lose value over time, exceptions exist, such as vintage cars and watches, which can rise in value significantly.
Examples of CGT classifications:
| Wasting chattels | Non-wasting chattels |
| Cars | Jewellery |
| Racehorses | Painting / artwork |
| Yachts | |
| Clocks / watches |
Investment considerations
The tax-free status of certain assets has encouraged many investors to explore investment opportunities in classic cars, fine wine, and artwork. However, the tax rules governing these investments are often more complex than some promotional materials suggest.
Classic cars
In the last 50 years, vintage cars have become an increasingly popular choice for investors due to their CGT-free status when the cars are sold. High-profile sales of such assets, include the world-record £114 million paid at auction in 2022 for the beautiful 1955 Mercedes-Benz 300 SLR Uhlenhaut Coupe in Stuttgart, Germany.
However, while profits are untaxed, losses cannot be offset against other taxable gains if you were to lose money on a car. For example, taking a classic car for a spin that results in damage or at worst, a crash, means you wouldn’t be able to claim tax relief on a loss.
Alcohol – fine wines and whisky
Investing in fine wines and whiskies is often marketed as tax-free. The global appeal in Scottish whisky has led to many new distilleries being set up across Scotland. However, the CGT rules surrounding wine and liquor are more nuanced than advertised. The tax status for wines and whiskies depends on the storage and lifespan of the products. That is why it is important to understand the distinction between these assets as the tax consequences could be substantial.
- Wine: Most wines are considered wasting chattels as they need to be consumed within 50 years.
- Fortified wines: This type of wine may be classified as a non-wasting chattel as they can have a longer shelf life (exceeding 50 years).
- Whisky: Whiskies stored in casks will seep into the wood of the casks over time and evaporate, therefore, it is generally considered a wasting chattel due to its shortened shelf life of less than 50 years. On the other hand, whisky stored in bottles can be classed as a non-wasting chattel as it is capable of lasting for over 50 years.
Artwork
Another investment opportunity worth considering is art. Artwork is nearly always classified as a non-wasting chattel and its value will typically determine its CGT status.
If a piece of art is sold for more than £6,000, CGT may apply. However, selling multiple pieces of artwork to the same buyer could trigger tax complications as HMRC may consider this a “set.” What does this mean exactly? If the total value of all assets, or multiple pieces of art sold together exceed £6,000, this will result in the seller being liable to CGT.
For married couples, jointly purchasing artwork can help reduce tax liabilities, as each partner has a separate £3,000 annual exemption. On the flipside, frequent buying and selling could attract scrutiny from HMRC as a trading activity, leading to additional tax implications.
Other tax considerations
It is important to consider other potential tax implications that may arise from investing in assets. While wasting chattels are exempt from CGT, other tax liabilities could unexpectedly apply.
If these investments are made frequently, HMRC may classify the activity as trading, which could result in liability for Income Tax and National Insurance. In such cases, VAT implications may also need to be assessed. Additionally, investors should be aware of potential exposure to Inheritance Tax (IHT). All assets form part of an individual’s estate upon death, meaning that items, such as wines and wine cellars, could be subject to IHT.
Planning for the future
Despite the potential tax advantages, tax-free investments are not always as straightforward as they seem. Rules may change, particularly with evolving government policies. Investors should seek professional advice to navigate tax complexities and avoid unexpected liabilities.
While CGT relief can make certain alternative investments appealing, investors must consider the full tax picture. Factors, such as asset classification, potential trading implications, and inheritance tax, should all be assessed carefully. As with any financial decision, a well-informed approach is key to maximising benefits and mitigating risks.
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