Selling a vintage wine collection could leave a bad taste in the mouth when the tax man comes calling for a share of the profits.
Many investors are turning to more exotic investments such as fine wine and classic cars to look for increased returns while interest rates are low and volatile stock markets are decimating funds.
But these increased returns come with higher risks – and one is selling just one vintage bottle of wine can bring the tax man calling for a slice of the profits. These profits can be significant with some vintages changing hands at thousands of pounds a bottle.
How a wine collection is taxed depends on how HM Revenue & Customs (HMRC) treat your trading status.
If you are a fine wine investor, buying to hold as an investment, any gain on disposal is taxed under capital gains tax rules.
Trader or collector?
If you are buying and selling wine as a trader, any profits made on disposal are taxed as income
The distinction is important:
- A trader’s profits are added to their other income and taxed at their marginal rate – which could be 20%, 40% or 45%.
- Investors classed as investors pay capital gains tax at 18%or 28%. They also have an annual exempt amount (£11,100 for the 2015-16 tax year). Investors do not pay tax on gains below this amount.
Some investors could cut their capital gains tax even more by applying other exemptions for wasting and non-wasting chattels.
Chattels are a complicated tax topic, so a good idea is to speak to a professional adviser to see if the rules apply to a disposal.
A wasting chattel has a useful life of less than 50 years and is exempt from tax, while a non-wasting chattel has an expected life of more than 50 years.
Fine wine, paintings and antiques are all treated as chattels.
That’s the spirit
For wine, the house producing the vintage will usually recommend a cellar life, which should include the time between bottling and purchase, not just the period of ownership.
These rules also apply to spirits, such as whisky, which have a shelf life of more than 50 years if they stay unopened.
One source of information about fine wine prices for collectors and traders is Liv Ex, a firm which tracks the performance of vintages in real time online.
Investors can offset any losses on fine wine disposals with any other capital gains.