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Passion Investments: the taxation of collections

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

The Knight Frank Luxury Investment Index tracking the value of ‘passion investments’ showed an increase in value of 5% over the 12 months to mid-2017, outperforming other safe-haven assets such as premise London residential property and gold.

Passion investments include classics cars, works of art, ceramics, fine wines, jewellery and furniture.
While they the joy of ownership may be the main reason for collecting such passion investments, they are nonetheless increasingly popular investments and in addition to their own investment and risk profiles, have important tax considerations for investors.

The Chattels Rules

Passion investments such as paintings, sculptures, ceramics, jewellery, watches, clocks and furniture are chattels.

A chattel is any item of tangible, movable property, that is, something that can be touched and can be moved. The capital gains tax legislation provides a distinct set of rules relating to the disposal of chattels and the computation of the chargeable gains that arise.

The disposal of a chattel for £6,000 or less is wholly exempt from capital gains tax and therefore no tax liability will arise on its disposal.

Should the proceeds exceed £6,000 but not £15,000, the calculation of the chargeable gain is more complex and will depend on the proceeds as well as the actual gain. To calculate the chargeable gain, the amount by which the disposal proceeds exceed £6,000 is multiplied by 5/3. This determines the maximum chargeable gain. The actual gain is then calculated using the normal rules for capital gains tax, deducting the purchase price and allowable costs from the disposal proceeds. The lower of the net gain and 5/3 of the proceeds in excess of £6,000 is the taxable gain. If the proceeds exceed £15,000, then the normal rules for calculating a capital gain apply.

There are also different rules for calculating losses on disposals. The loss that can be claimed depends on the amount of the disposal proceeds. If the disposal proceeds were less than £6,000, then the loss is restricted by treating the disposal proceeds as £6,000 and recalculating the loss on disposal. If the disposal proceeds were more than £6,000, the loss is unrestricted. The losses calculated can be offset against other gains of the same tax year or carried forward to set against gains in future tax years.

Wasting assets
Capital gains tax is not due on disposals of ‘wasting assets’, defined as those with a predictable life of less than 50 years unless:

    • • Capital allowances have, or could have been claimed on it;

 

    • It was loaned to a business which then used it as plant.

Certain chattels such as plant and machinery are always treated as wasting assets. Consequently, passion investments with mechanical parts such as watches and clocks are treated as wasting assets and therefore exempt from capital gains tax.

While this means that no gains arise on a disposal of the assets at a gain, it also means that capital losses are not available if they are sold at a loss.

Whether a passion investment has an expected life of less than 50 years and is therefore a wasting asset can be a grey area, e.g. fine wines. HMRC’s position is that certain fine wines would not be considered a wasting asset for capital gains tax purposes and therefore any gain on disposal would be taxable (thought they would potentially benefit from to the ‘chattel rules’ outlined above, meaning that those bought and sold for under £6,000 would still be exempt from capital gains tax).

Sets
A set is a number of chattels that are similar and complementary to each other and worth more together than separately. Examples provide by HMRC include chessmen and books by the same authority or on the same subject.

If a number of chattels that form a set are disposed of, the £6,000 limit applies to the set rather than individual chattels. There are also special rules that apply to sets which are broken up and sold separately. If the parts of the set are disposed of to the same person or a number of persons acting together, or a number of people who are connected, then the £6,000 limit applies to all of the set collectively and not to each member of the set individually.

For example, in the case of fine wines, trying to circumvent the £6,000 exemption by disposing of bottles from the same case will fail if the sale is to the same or connected people. In such cases, the £6,000 exemption will apply to a gain calculated in reference to the combined value of the ‘set’.

Cars
Cars are exempted by a specific statutory provision from capital gains tax.
This applies to classic cars as well as more recent ones. The exemption does not apply to racing cars, single seat sports cars or motorcycles, though these should be exempted on the basis that they are wasting assets and a chargeable gain would only arise where capital allowances were, or could have been, claimed.

Investment or trading
Should an individual be dealing in fine wine, cars or other assets, then capital gains tax treatment will not apply and instead the profits arising will be subject to income tax as trading profits.

Whether they are investing or trading is determined by the ‘badges of trade’.

If they are trading, then the individual may also be potentially registerable for VAT purposes.

Gifts
The rules outlined above apply equally to the gift of chattels as well as their sale.
A gift to a connected party such as a family member may be deemed to take place at market value and therefore give rise to capital gains tax considerations unless exempted because it is a chattel and the deemed proceeds are less than £6,000 or it is a wasting asset.

Inheritance tax
It is worth noting that unlike for capital gains tax there is no such concept of wasting assets for inheritance tax. The value of deceased’s wine collection, classic car collection and art collection for example would be included in the value of their estate for inheritance tax purposes based on the probate value of the collection.

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