I’m keen to make some non-traditional investments and have been told that fine wine and watches are exempt from capital gains tax on sale. Is this right?
Lilly Whale, an associate in the private client team at RWK Goodman, says there are useful capital gains tax (CGT) exemptions on the selling or gifting of personal chattels so you are wise to consider investing in fine wine and watches which could also be rather fun.
A chattel is a legal term for a tangible, moveable asset such as antiques, jewellery, art, clothes, cars, fine wine and watches. Some chattels automatically benefit from CGT allowances and some are exempt. Private cars, for instance, are always exempt on disposal from CGT on the grounds that they are a wasting asset.
A wasting asset is one with a predictable life of 50 years or less. As well as private cars, other examples include plant or machinery, racehorses and shotguns. Watches and clocks are considered wasting assets as their mechanics are not deemed to have a lifespan of over 50 years.
Consequently, the disposal of a watch — even if antique or very costly — will not trigger a CGT liability unless it has been used in the course of business.
The disposal of fine wine is more nuanced and whether CGT relief is available circles around whether —— to quote HM Revenue & Customs — the wine is “cheap table wine which may turn to vinegar”. If this is the case, the wine would inevitably fall into the wasting asset category and there would be no CGT liability on its sale.
On the other hand, wine with a storage life of beyond 50 years — for instance port and other fortified wines — would not be considered wasting and therefore capital gains tax may well be applicable if you decide to sell or gift it at a later date.
Clearly, a multitude of fine wines exist between an average bottle and, say, a 19th century bottle of port. The sliding scale creates a grey area from a tax perspective and broadly HMRC will consider the case on its individual facts: along with shelf life, the wine’s provenance, condition and vintage will all be pertinent.
An important point to note is that the 50-year time limit begins when the wine was purchased, not when it was bottled. Detailed records could therefore be useful evidence if HMRC raises any queries on the disposal following the submission of a self assessment tax return.
If you decide to invest in fine wine which is not deemed a wasting asset, you would still benefit from an exemption of up to £6,000 on its disposal, meaning that if the sale proceeds are less than this sum, no CGT is levied. This applies to all chattels and is not exclusive to the sale of fine wine.
One final point: there are additional rules if the wine (or any other chattel) in question forms part of a set. If the individual wine bottles were owned at the same time and are sold to the same person or connected people (including family members), the £6,000 exemption applies to the set as a collective and not each wine bottle.
How can I protect my family from IHT?
I’ve been reading about HMRC stepping up its investigations on inheritance tax. I give money to my grandchildren regularly to help with university fees and my assets include things such as family jewellery and paintings, which I want to leave to them when I die. What are the best ways to protect my family from penalties after my death?
Stephanie Mooney, a senior associate in the private client team at Kingsley Napley, says HMRC is doing all it can to squeeze as much inheritance tax (IHT) from estates as possible by making more inquiries and opening investigations. Estates totalling more than £2mn are particularly on its radar.
One area under scrutiny is gifts made within seven years of death. Often, individuals do not leave a clear record of gifts made, so it becomes the job of those dealing with an estate to ask questions and trawl through bank statements to identify the value and nature of any gifts.
It would therefore make things easier for your family if you keep a clear but simple written record of any gifts you make and store this with a copy of your will. This will include the money you give towards university fees but should also include any other cash or assets that you give away. This record will help those handling your estate in due course to identify what IHT exemptions and reliefs can be claimed and how much IHT, if any, is payable.
You should also ensure that you have a valid, professionally drafted will in place which is structured so as to take advantage of any IHT exemptions, makes your wishes completely clear and appoints appropriate people as executors.
You can leave your jewellery and paintings (which come under the category of “personal chattels”) to whoever you wish in your will. It will then be the job of your executors to ensure that those items are properly valued for probate purposes following your death.
HMRC has always looked very closely at property values. It is also however essential to show that care has been taken to value personal chattels. If these items might be of significant value (over £1,500), the safest action would be for your executors to arrange items to be individually valued by someone appropriately qualified. The valuation should be included with the IHT papers they send to HMRC.
Our next question
My wife and I plan to buy a home in London for our family so our children can enrol in a British school. We’re US citizens and plan to keep our estate in California. We’ve heard we need to be wary of double taxation and UK inheritance tax. What planning do we need to do to avoid UK tax traps and when should we start looking at this?
Given that your executors will be the ones dealing with HMRC following your death, you should encourage them to take legal advice when dealing with the administration of your estate. They can then ensure that they show HMRC that considerable care has been taken by them when reporting your estate for IHT purposes.
Ultimately, they should read carefully the declaration they will have to make in the IHT return, ensure that they understand their responsibilities and only submit the IHT return once they are comfortable that they have satisfied their obligations.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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