Fine wine investment is often advertised as a ‘tax-free investment’.
Whilst fine wine certainly can be considered more tax-efficient than other forms of investment, there a number of key considerations to make and it is crucial to observe that legislation in this area is not always black and white. We recommend you consult with your tax adviser to see how to make the most of fine wine as an asset.
Section 160 of the Inheritance Tax Act 1984 states that Inheritance Tax (IHT) is applied to the value of any property at the date of application, not at its original purchase value.
“It is clear that a wine cellar must be valued at its open market value for Inheritance Tax purposes at the time of the relevant occasion of charge” (HRMC Newsletter August 2010)
For IHT purposes a ‘wine cellar’ is any collection of wine forming part of an estate over the IHT threshold, no matter how it is stored or in what quantity.
Capital Gains Tax
Capital Gains Tax (CGT) does not apply to ‘wasting assets’, those whose predictable life does not exceed more than 50 years (Section 44(1) Taxation of Chargeable Gains Act 1992).
Issue 1: ‘Predictable life’
The law makes clear that cheap table wine is a wasting asset, whereas a fortified wine designed to withstand significant ageing, such as a premium port, is not.
“We would normally contend that wine is not a wasting asset if it appears to be fine wine which not unusually is kept (or some samples of which are kept) for substantial periods sometimes well in excess of 50 years” (HRMC Tax Bulletin 42)
Much fine wine constitutes something of a grey area- much of it having the capacity to age for half a century or more but consumed before it reaches this age. A number of factors may affect the lifespan of a fine wine- vintage, terroir, provenance and storage to name just a few
The ‘predictable life’ is therefore a crucial consideration. This lifespan is taken from the point of view of the owner at the point of purchase, and as such must be decided objectively.
The law is far from clear cut in this regard. Wine is a greatly nuanced art and the application of a catch-all rule, is nigh-on impossible though a great many investment wines are considered wasting assets and as such investors are not liable to pay CGT on profit from wine investments not exceeding £250,000.
Issue 2: CGT Exemptions
If the profit from the sale of a single bottle of wine not considered a wasting asset does not exceed £6,000, CGT does not apply (Section 261(1) TCGA).
If a number of bottles sold to the same individual, in one or a number of transactions, may be considered a ‘set’, then the £6,000 pound gains limit applies to the sale of all bottles affected (Section 262(4) TCGA).
Bottles sold to the same individual may be considered a ‘set’ when they are:
- “similar and complementary”- i.e. they belong to the same vintage and the same vineyard, and
- of greater value when sold collectively, rather than as individual bottles.
(HRMC Tax Bulletin 42)