In a nutshell, we often say that wine investment does not draw capital gains tax (CGT) on realised profits, with exception of some wines like port and Madeira and other fortified wines. However, the actual matter of taxation on wine investment is quite detailed and complex.
The Wasting Assets Exemption
The tax exemption often claimed on wine is based on the HMRC (Her Majesty’s Revenue & Customs) categorisation of some wines as a ‘wasting asset’. A ‘wasting asset’, in simple terms, is an asset with a life of fewer than 50 years. Do many wines fit this criterion? Yes, but many investment-grade wines do not. In fact, age-ability is a specific characteristic of fine wines, which puts many fine vintages outside the ‘wasting asset’ category.
The HMRC itself goes on to state: “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.”
The HMRC also says that fortified wines like port and sherry have a very long shelf life and cannot qualify as wasting assets. These would therefore be subject to CGT on profits made from sales.
But it is worth noting that the 50-year period is counted from the time the asset is acquired. So, a premier cru Bordeaux bought en primeur may not qualify as a wasting asset since it is likely to be drinkable 50 years hence. But a 40 or 50-year-old vintage from the same vineyard might not have a life expectancy of another 50 years and would therefore count as a wasting asset. If you sell the latter at a profit, it won’t attract CGT.
The Chattels Exemption
Aside from the Wasting Assets exemption, there is one more tax exemption that can be considered. A chattel is a tangible, moveable asset that is worth less than £6,000 on disposal and is exempt from CGT. Many wines can be covered under this exemption, but many premium and luxury wines are priced higher and cannot be covered as chattel. In this case, CGT will apply at the regular rate of 20% on the gain from their sale or disposal.
The complexity here is that profit made on wine is theoretically calculated per bottle, but wines sold by the case or as a collection to a single buyer may be considered a ‘set’ or unit. Then a single bottle won’t qualify as a chattel, and CGT liability would be calculated on the case, not per bottle. This especially happens if the value of the set or collection is higher than the total value of the bottles in it. If the set is valued at more than £6,000, no chattel exemption will apply.
Other tax aspects to consider for fine wine
- Inherence Tax (IHT) is also applicable to wine. If you retain ownership of wine until death, its current value will be included in the value of the estate and other inheritance and may be subjected to IHT at a rate of 40%. If the inheritance includes any cases or sets that are valued higher than the sum of the individual bottles in it, the higher value will be considered for IHT. In the case of IHT on wine, the wasting asset rule is not considered.
However, if you give away a set or a collection as a gift while you are alive, and if you live for another seven years from the date of the said gift being given, the value of this collection will not come under the IHT net. CGT will still apply though since a gift is treated as a disposal at full value.
- If you buy and sell wine on the market regularly, the profits will be counted as taxable income and attract income tax.
- Remember that you are also paying VAT and duty when buying wine in a retail settling. The applicable VAT on all wine is currently 20%.
It may be wise to get specialised tax advice if you are serious about fine wine investment. Despite the complications in the tax rules, investment-grade wines are an attractive alternative asset that promises stability and long-term gains.
