Since investment in classic cars featured in the Financial Times’ rather good recent article on “15 Ways to Reduce Your Tax Bill” and interest in alternative assets such as fine wine seems to be on the increase, we thought it might be helpful to summarise the treatment of chattels for Capital Gains Tax (“CGT”).
The starting point is that CGT applies to gains made on the disposal of all “assets” and that includes all forms of personal moveable property as well as some less obvious things, like foreign currency. There are special rules, however, for “tangible moveable property” which would include, for instance, antiques, stamps, fine wine or jewellery.
The S.262 Rules
Where the disposal value of assets of this type is less than £6,000, there is an exemption under s.262 of the Taxation of Chargeable Gains Act 1992 (“TCGA”). There is also a corresponding restriction of allowable losses. The exemption has been in place for many years, though the cash figure has not been adjusted to allow for inflation, so it is now a less generous limit than it was originally.
If the disposal value is over £6,000 but under £15,000 there is a further relief under the same section so that CGT is only paid on an amount limited to the lesser of (a) the actual gain and (b) 5/3 of the disposal proceeds less £6,000.
Some examples may help to illustrate how this works in practice:
Suppose a person sells for £4,000 a ring they originally bought five years ago for £2,000. The sale price is below the £6,000 limit, so there is no chargeable gain at all.
Now suppose instead that they had purchased it for £2,000 20 years ago, and it can now be sold for £10,000. Let us also suppose that there were costs of the original purchase totalling 10% (£200) and costs of sale totalling 10% (£1,000). The actual gain is £8,000 less the total costs of £1,200 for a net gain of £6,800. However 5/3 of the difference between the value on disposal and £6,000 is £6,666 (£10,000-£6,000 = £4,000 x 5/3 = £6,666) so only this smaller amount is the chargeable gain. Note that the 5/3 fraction is applied to the gross value on disposal, not the net.
Finally, suppose they were unfortunate enough to buy the ring for £7,000 but had to sell it in a hurry, realising only £4,000 after costs of sale. Their actual loss is £3,000 but the proceeds on disposal are deemed to be £6,000 because the actual consideration was under this figure, so the only loss that can be used to set against other gains in that tax year is £7,000-£6,000 = £1,000.
Cars, Clocks and Watches
A “mechanically propelled road vehicle constructed or adapted for the carrying of passengers except for a vehicle of a type not commonly used as a private vehicle and unsuitable to be so used” does not count as a chargeable asset for CGT under S.263 TCGA. That means that if you can make a gain on a classic car, the chances are that it will completely exempt, even if it is a Ferrari worth millions and the gain is substantial. This is only fair because, of course, the more common experience of most taxpayers is that they buy a new car which then falls in value by the time it is sold or traded in, and the exemption means that HMRC disallow all these losses.
What if the classic car you invest in is a Formula 1 single-seater racing car, however, which is certainly not suitable for carrying passengers and would be desperately unsuitable as a private road vehicle?
All is not lost. Under a different section, S.45 TCGA, tangible moveable property is exempt if it is a “wasting asset”. Wasting assets are defined in S.44 TCGA as assets with a predictable life of no more than 50 years, excluding assets on which capital allowances have actually been claimed, or could have been claimed for business purposes but including all other “plant and machinery” whatever its actual age. That means that all mechanical devices, which are automatically treated as “plant and machinery” are covered by the exemption.
This would certainly include that Formula 1 racing car (even if it is, in fact, more than 50 years old) and also, usefully, clocks and watches bought and sold by private collectors. There was a bit of an argument with the Inland Revenue (as it was at the time) over shotguns, with the Revenue at one time heroically claiming they were not “mechanical devices” because the parts only moved for a brief moment when a shot is actually fired as a result of the trigger being pulled, but the matter has now been settled and these, too, are now accepted as being covered by the wasting assets exemption. HMRC have also confirmed that powerboats, yachts with inboard engines and trains qualify. So if you own a valuable collection of antique trains, you are fine. Even if they are only Hornby model trains, they are still “plant and machinery”.
The Executors of the splendidly-titled Lord Howard of Henderskelfe even managed, somehow, to persuade the Court of Appeal that a valuable painting by Joshua Reynolds, on display in Castle Howard for over 200 years and sold for £9.4m, was “plant” and therefore a wasting asset exempt from CGT because it had been loaned to the company which operated the stately home as a tourist attraction to attract more visitors (despite an unfortunate lack of paperwork to document this arrangement). Needless to say, this was swiftly followed by legislation clarifying that an asset (for example, as the guidance notes point out with something approaching civil service sarcasm, a valuable historic painting) was not to be treated as “plant” just because it had been loaned to a business if the owner had not, in fact, used it as “plant” in his own business.
Most wine is, of course, consumed within 50 years of its production, so you might think it would automatically qualify as a “wasting asset”. You do see claims from some wine investment companies and journalists that this is the case. HMRC take the view, however, that if wine is of a type which could be “laid down” for longer periods, such as vintage Claret, Champagne, Sauternes or Port, it may well not qualify for “wasting assets” treatment. Again, you might think this is not an issue because, in any event, even fine wine will normally sell for less than £6,000 a bottle. However, a “set” of similar assets sold at the same time is treated as only one asset for purposes of the S.262 exemption if they are worth more when sold together than if sold separately, so selling a whole case or more of a wine of the same vintage from the same producer to the same person (for example, at auction) could well get you into trouble.
Gold and silver, whether in the form of bars, antiques or foreign coins, will be subject to CGT. Gold coins qualifying as foreign currency because they are legal tender in another country are a particular problem, because the S.262 £6,000 exemption is not available. However, sterling currency, which includes all forms of UK legal tender such as, for instance, the sovereign, half sovereign or Britannia, is exempt.
If you have any question about CGT on a particular item or collection, please just get in touch with us, using the contact form on the website, and we will be happy to discuss it with you.