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  • Tax on collectables – the tax man ‘don’t want you for a sunbeam’

    30 May 2020

    Andy Wood

    The Times reported last week that the guitar used by Kurt Cobain during  Nirvana’s seminal MTV Unplugged in New York performance has sold for
    more than £4.8m at auction.

    Cobain died just five months after the November 1993 concert aged 27. The sale has apparently set five world records, including the most expensive guitar sold and also the most expensive piece of memorabilia. To be fair, none of my guitars are yet to hit the market.

    However, it is not only grunge guitars that are whetting collector’s appetites. Recent reports have said designer handbags are currently the most profitable luxury investment, having toppled rare whisky from its perch looking at one-year returns. Indeed, a price rise of 13% in 12 months certainly provides an excuse to splurge the cash at newly opened shops!

    But guitars and handbags – like the more traditional art, jewellery and antiques – will be subject to similar sets of tax rules.

    What are those rules?

    Tax on collectables

    Generally speaking, these items will be ‘chattels’ which are defined for tax purposes as ‘tangible moveable property’. So will cover, art, antiques, handbags and Kurt’s guitar.

    There is one significant exemption to these rules where the asset is a ‘wasting asset’ (See below).

    Firstly, where the proceeds do not exceed £6k then the asset is not subject to Capital Gains Tax (“CGT”). If the sale proceeds exceed £6k then an element of relief is available. In such circumstances, the gain is limited to 5/3 x excess of sale proceeds over £6k. There are special rules where one is selling one of a set of chattels – for example, 1 out of a set of 3 vases – to the same person or a connected person.

    If there is a tax liability, then any unused annual exemption will be available for the vendor.

    Classic cars and other ‘wasting assets’

    Where the asset is a wasting asset then the gain is exempt from tax. Not bad, eh? A wasting asset is perhaps best known as one with a predictable life of 50 years or less.

    The classic example of a wasting asset is the, er, classic car. However, it is also the case that an asset, where it is used in a business and it is plant and machinery, it will be considered to be a wasting asset in any event.

    This perhaps resulted in an odd result in the case of The Executors of Lord Howard of Henderskelfe where an 18th century painting was treated as plant and machinery and therefore a wasting asset due to the fact it was hung on the wall in a business.

    So perhaps Kurt’s guitar, if it was hung on the wall in a bar, could be a wasting asset and free from CGT?

    Am I a dealer?

    Clearly, someone who is buying and selling handbags, antiques, paintings etc could be acting as a dealer or ‘trading’.

    If this is the case then the tax treatment is very different. Here the profits will be taxed as the profits of a business rather than under the CGT rules. If the dealer is doing it in his or her sole capacity then the profits will be subject to income tax.

    If you think this applies to you then you should get tax advice to confirm the position.

    If you have any queries about tax on collectables, or tax matters in general, then please get in touch.