Many people dabble in buying fine wines, usually for personal use in years to come, or perhaps “laying down” for their children or god children. But sometimes they may over - estimate the ability of themselves, family and friends to glug their way through all the bottles in the cellar. If so, they may then sell a few cases, hoping to make a profit and fund the purchase of a few more cases for drinking even further into the future.
As in so many areas of life, the tax man can intervene unexpectedly, perhaps because they monitor the sale of wines at auction and undertake spot checks to find out if sales have been declared for Capital Gains Tax or, even naughtier, “trading” on a regular basis without declaring the profits for tax.
- Capital Gains Tax (CGT)
Wine is an asset which is potentially subject to CGT but in many cases any profit will be covered by an exemption for ”wasting assets”. The criteria for exemption are that:
- the asset must be tangible moveable property (easy to carry a bottle of wine from cellar to table!); and
- has a predictable life at the time of purchase not exceeding fifty years.
Most table wines will not last for fifty years in bottle, and so the wasting asset exemption should apply. But vintage port may last that long while Madeira, Cognac and other spirits may last even longer and increase in value accordingly.
Apart from the wasting asset exemption, there is an exemption for “chattels” (another word for tangible moveable property) of £6000 per item, with a special rule to catch attempts to sell parts of a “set” individually.
Rarity value can increase the auction price of even a single bottle to well over £6000. The typical sale lot for drinkable wine is a case of 12, and a well known claret or burgundy could easily be worth £1000 per bottle and more - £12,000 for the “set”? Selling or giving away a bottle or case over the £6000 limit could attract a CGT liability.
- Inheritance Tax (IHT)
Whatever the CGT position may be during your lifetime (CGT does not apply on death), there is no exemption for wasting assets or chattels for IHT. So, a lifetime gift of a case or two of Port may be subject to Inheritance Tax if the donor does not survive by seven years. For IHT the annual gift exemption is only £3000 and it is not difficult to find fine wines costing over £250 per bottle (£3,000 for a case). The same case if gifted on death under your Will as a specific legacy, after maturing for several years, may then be worth far more, and bear IHT at 40%
Worse still, if you had ten cases of fine claret at £10,000 per case and a total value of £100,000 readily achievable at auction, there might be £40,000 of IHT to pay from the rest of your estate unless you left it all to your surviving spouse or civil partner
- Tax Avoidance Strategy?
The safe way to avoid CGT during your lifetime, or IHT on the contents of your cellar at your death, is to drink it all yourself. Maybe you should develop a cellar plan to drink it all during your lifetime? Or a plan to give away the surplus bottles one by one to friends, avoiding lifetime CGT, and depriving the taxman of a 40% share on your death? But on reflection does this not sound like deliberate tax evasion, to be caught under the GAAR (general anti-abuse rule) which comes into effect on 1 April 2013? Perhaps you should drink up before the deadline?
We probably can’t assist you with this, but any request to the editor for help, accompanied by a sample bottle to our London office, will be given serious consideration.