UK Tax Implications

The tax treatment of wine held as an investment is not straightforward, whilst it is often believed that wine is a tax free asset, this is not always the case. We have asked an expert to offer her opinion to provide a platform for you to identify the best practice necessary to match your situation.

Wine is considered a “chattel” for Capital Gains Tax (CGT) and thus within the scope of CGT, however, there are two important exemptions described below which may remove any gains from tax exemptions described below.

Gains on the disposal of chattels which are also ‘wasting assets’ are exempt from CGT. A wasting asset has a predictable useful life of less than 50 years at acquisition. So, the first question is: does the wine in question have a useful life of less than 50 years at the time of acquisition, or not? In the case of wine, this is interpreted as – will the wine become undrinkable within 50 years of acquisition?

HMRC acknowledge that cheap table wine which (in their words) “may turn to vinegar within a relatively short period, even in unopened bottles” is a wasting asset and exempt from CGT. Conversely, HMRC state that wines which have a very long storage life, such as premium port and other fortified wines, will not be wasting assets and so will be subject to CGT. Whilst many wines are undrinkable after 50 years, this may not be the case for investment grade wines. However, the age of the bottle when purchased will be important. For example, a fine wine from a good vintage bought ‘en primeur’ should still be drinkable after 50 years and CGT is due on any gain arising to that original purchaser on sale. However, if the same bottle was purchased as a 30 year-old wine it may not have a life expectancy of another 50 years in the hands of the new acquirer, so would be classed as a wasting asset for that owner and there would be no CGT on a future sale.

It is important to note that the predictable useful life of the wine is assessed when the wine is acquired and this determines the tax treatment, even if this assessment later turns out to be wrong. It could be the case that the wine is assessed as not having a life of more than 50 years but later proves to still be drinkable – the wine would still be exempt from CGT.

In many cases it is not simple to ascertain whether a fine wine will be drinkable after 50 years. Many fine wines remain drinkable despite an alteration in the initial taste. In such circumstances, HMRC will look to ascertain whether the wine is likely to become undrinkable or will have merely matured.

HMRC generally takes the view that the ‘wasting asset exemption’ will not apply to fine wines which are not unusually kept for substantial periods.

Wine investments (whether wasting or not) will still be fully exempt from CGT where the disposal proceeds do not exceed £6,000.

If the disposal consideration exceeds £6,000, the chargeable gain is tapered using a special calculation. However, once the taxable consideration for the disposal of wine exceeds £15,000, there is no benefit from this exemption and the disposal is fully subject to CGT.

If a number of bottles are sold as a “set” the £6,000 limit is applied to the entire set not to individual bottles. It is important to note that the obligation and onus of proof of eligibility for the exemption are on the taxpayer and, where a number of bottles of wine are sold to the same person in one or more transactions, then the question might arise as to whether the series of bottles constitute a ‘set’. This is a question of fact and would include factors such as:

• 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.

As investment wine is often a highly valuable asset, the inheritance tax (IHT) implications of any gifts in life and on death should also be considered.

Wine is valued at current market value at the date of the gift or death and is added to the taxable estate for IHT purposes. The above CGT exemptions do not apply for IHT purposes.

If an individual decides to buy and sell wine regularly this could become a ‘trade’ with profits taxed at income tax rates which are generally higher than CGT rates.

HMRC sets out nine ‘badges of trade’ that can indicate whether an individual is trading, however the distinction between trading and investment is often a grey area.

Factors such as a number of similar profitable transactions or active management of a client’s cellar by a wine merchant could suggest that a trade exists rather than a passive investment activity. If wine is held as a trading asset, the CGT exemptions described above are not available.