The enduring myth of wine's exemption from CGT

From the UKV International AG site

One of the signs of a dubious wine investment company is the bold claim that profits from wine investment are tax free in relation to capital gains tax. Unfortunately the position is not as simple as this.

HMRC advice:

'Wasting assets: wines and spirits

TCGA92/S44 and TCGA92/S45

HMRC’s view of the treatment of bottled wines and spirits was first set out in Tax Bulletin 42 published in August 1999.  This guidance focusses on the availability of the chattels exemption, TCGA92/S262, and the wasting asset exemption, TCGA92/S45(1).

Chattels exemption

Bottled wines and spirits are chattels (tangible moveable property) so disposals for £6,000 or less will be exempt under TCGA92/S262, see CG76573.  If the bottles are disposed of to the same person then they may form a set.  This would depend on the facts of the case including:

• whether the bottles are “similar and complementary” - which would require the wine in them to have been produced from the same vineyard in the same vintage year, and
• whether the bottles are of greater worth when sold collectively than when sold individually

See CG76631 onwards for more details.

Wasting asset exemption

A wasting asset is an asset with a predictable life not exceeding fifty years at the time when it was acquired, TCGA92/S44(1).  Whilst this definition would clearly apply to cheap table wine which may turn to vinegar within a relatively short period, even in unopened bottles, our view is that it would certainly not apply to port and other fortified wines which are generally recognised to have a very long storage life.
Between these extremes, there are a number of fine wines which are quite drinkable after a substantial period although of course the taste alters over that time.  With these the basic consideration, in our view, is whether the wine has turned to vinegar or has merely matured.  Of course in practice, most wine is drunk well below the age of 50 years and in that sense it is very difficult to consider the issue in isolation.  However, where the facts justify it, 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.'

There is also this useful article by Philip Whitcomb:

The taxing issue of wine

'Since the age of 18, I have always had an interest in wine. Not just the drinking of it, although I do enjoy that part, but also the laying down and collection of fine wines.
Fine wine investments are often advertised as a tax-free investment, and the average value of fine wines in 2016 rose by around 25%. Whilst such an investment can be tax efficient, there are a number of key considerations which need to be kept in mind. The tax treatment is not as black or white (or perhaps that should be red and white) as you might suppose.'
Read the rest here.

For wine to be a 'wasting asset' it must be undrinkable if kept for 50 years. Although will be true for many wines, it is clear that investment grade fortified wines, such as Port and Madeira, are not wasting assets as they are certainly considered to be drinkable after 50 years from the time they were made assuming the wine was bought soon after it was produced.

These wines may, however, become 'wasting assets' depending on when they were purchased:

HMRC: 'A wasting asset is an asset with a predictable life not exceeding fifty years at the time when it was acquired'.  
If you bought a case of 1963 Taylors Vintage Port soon after it was released, you would be liable for CGT on any profit you made above £6000 on the case. It is likely that HMRC would consider the case as 'similar and complementary' so it would be difficult to claim this £6000 applied to each bottle. 1963 Taylors is still available today as wine-searcher shows and if bought now might well count as a 'wasting asset' as it might well not be drinkable in 2070.
Top Bordeaux, especially from good vintages, clearly has a life of more than 50 years. For instance wine-searcher today lists three pages of 1970 Lafite-Rothschild being offered for sale around the world. Either there is an extraordinary demand for expensive vinegar or there is a widespread expectation that the 1970 Lafite will still make pleasurable drinking. Again when the asset was bought will be a crucial factor in determining whether it is a 'wasting asset' or not.   
It is prudent to assume that First Growth and other top Bordeaux reds as well as Sauternes and Barsacs are not wasting assets if purchased either en primeur or soon after bottling as they have a life expectancy of more than 50 years. Of course it will be rare that Sauternes and Barsacs with the exception of d'Yquem make enough profit when sold to qualify for CGT.  

Inheritance tax
The position regarding inheritance tax is more straightforward. Wine counts as part of your estate full stop. There are no exemptions. Its value is calculated on what it would sell for now rather than on its price when bought. 

Wine investment and inheritance tax: a further warning

News - Tax
Written by Ray Clancy
Wednesday, 13 October 2010 10:25
UK investors in wine are building up huge unexpected tax bills having been misled by salesmen over how HM Revenue and Customs treat wine, it is claimed.   HMRC recently produced guidance warning of increasingly widespread misunderstanding that the value of wine investments for inheritance tax (IHT) purposes is based on the purchase price of wine rather than its current market value. Read the rest here. ** Clearly anyone considering wine investment or who already has wine investments should get professional tax advice and not rely on what some high pressure telesales person tells them. Nor should they rely on claims about wine being a tax-free investment made on some companies' websites. Although many wines but not all are considered by HM Reveue and Customs to be wasting assets, the concept of wasting assets does not apply for inheritance tax. Inheritance tax values are based on current prices and not the price at which the wine was bought.

Wine – really a 'wasting asset'?

1981 Vieux Domaine de Taste, Côtes de Bourg*

An md of a  company intending to sell 2009 Bordeaux en primeur kindly sent me their prospectus today inviting comment. I picked out the following pasage:

'The tax advantage:

Wines purchased en primeur exclude import duty & VAT. Such tax-free status is maintained by storing wines in our customs-bonded regulated facilities (our partner is Vinothèque). Wine is classed as a  'wasting asset' by HM Revenue & Customs and as such any profit made on the sale of these products is generally fully exempt from Capital Gains Tax.' 

Amongst the fine wine trade there appears to be a certain amount of wishful thinking regarding Capital Gains Tax. Wine is regarded as a 'wasting asset' if it is undrinkable in less than 50 years from the time it was bought. Anyone buying First Growth 2009 Bordeaux en primeur should I would suggest expect to pay capital gains, subject to the normal thresholds, as it is surely reasonable to expect that the top 2009s will still be drinkable in 2060. Quite how 'drinkable' as definedby the tax authorities is an intriguing question. 

Whether wine is a 'wasting asset' or not depends in part on when you bought the wine. Buying top Bordeaux in its youth will mean that in good to great vintages it won't be classified as a 'wasting asset'. However, buying 1945 Mouton-Rothschild now may well mean that you have purchased a 'wasting asset' as this wine may not last another 50 years.

* Even quite modest wines from Bordeaux can last for decades. Take the 1981 Vieux Domaine de Taste, Côtes de Bourg that I opened this week. Although mearly 30 years old, not kept in ideal conditions and not from a stellar vintage this is still very drinkable with sweet evolved fruit. So if this Côtes de Bourg is still drinkable after 30 years and probably good for a few more years, although I doubt whether it will get better, a First Growth is likely to make its 50th birthday.

The official view

From:

Tax Bulletin Issue 42

 

INLAND REVENUE TAX BULLETIN
Issue 42

WINES & SPIRITS:
THE CAPITAL GAINS TAX TREATMENT

We have received a number of enquiries recently about the Capital Gains Tax treatment of bottles of wines, particularly "fine" wines, and spirits. This article sets out the position for transactions where the correct charge is to Capital Gains Tax. It is written on the premise that any transactions by private individuals involving the acquisition and disposal of such wines are not regarded as "trading" or an "adventure in the nature of trade" within the charge to Income Tax under Case I of Schedule D.

Where bottled wine is purchased, each bottle is a chattel for Capital Gains Tax purposes. As gains on the disposal of chattels which are also wasting assets are generally exempt from Capital Gains Tax, Section 45(1) Taxation of Chargeable Gains Act 1992 (TCGA), then the first question is whether bottled wine is a wasting asset or not.

For Capital Gains Tax purposes a wasting asset is one whose predictable life, from the point of view of the person acquiring it, does not exceed 50 years, Section 44(1) TCGA. Whilst this definition would clearly apply to cheap table wine which may turn to vinegar within a relatively short period, even in unopened bottles, our view is that it would certainly not apply to port and other fortified wines which are generally recognised to have a very long storage life.

Between these extremes, there are a number of fine wines which are quite drinkable after a substantial period although of course the taste alters over that time. With these the basic consideration, in our view, is whether the wine has turned to vinegar or has merely matured. Of course in practice, most wine is drunk well below the age of 50 years and in that sense it is very difficult to consider the issue in isolation. However, where the facts justify it, 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.

If a particular bottle of wine is not a wasting asset, then any gain accruing on its disposal may nevertheless be exempt where the disposal proceeds for that single bottle do not exceed £6,000, Section 262(1) TCGA. Where however, a number of bottles are sold to the same person in one or more transactions, then the question might arise as to whether the bottles themselves constitute a "set". If they do, then the £6,000 limit would apply to the overall sale proceeds rather than the price fetched for any individual bottle, Section 262(4). This is a question of fact and would depend on:

(a) whether the bottles are "similar and complementary" - which would require the wine in them to have been produced from the same vineyard in the same vintage year, and

(b) whether the bottles are of greater worth when sold collectively than when sold individually.