Investing in wine; is there a better tax haven?

Richard Holme and Ola Majcherczyk, from award-winning Tunbridge Wells-based accountancy firm Creaseys, look at some general principles of tax and how they apply to investing in wine

Richard Holme and Ola Majcherczyk Creaseys

Richard Holme and Ola Majcherczyk, from the award-winning Tunbridge Wells-based accountancy firm Creaseys, look at some general principles of tax and how they apply to investing in wine, as well as some very useful specific provisions not often encountered

Imagine an investment that has increased in value by more than 1% each month since the mid-1950s and on which tax free returns might be enjoyed with careful planning. Imagine also that there may be inheritance tax benefits and if the investment proves financially disappointing, it can always be consumed with pleasure and a capital loss possibly claimed! All of these promotional points appear on the websites of wine brokers – how far can the promises be sustained and what problems may arise in practice?

Trading in wine?
Before going any further, it should not be forgotten that sales of wine at a profit may give rise to a trade subject to income tax even if the transactions concerned are isolated or casual.  A sobering case is CIR v Fraser [ 24 TC 488 ] where a woodcutter bought some whisky for the princely sum of £407 and then sold it on two or three years later in 1940 for £1,131, having seen his asset appreciate in value due to the war.  He had no special expertise in the whisky industry. This transaction was held to be a trade and one wonders whether this old case could be deployed against modern day wine investors? Regard as ever needs to be paid to case law like this as well as the ‘badges of trade’ set out in the final report of the 1955 Royal Commission on the Taxation of Profits and Income. The badges of trade, of course, prompt a number of aspects to be considered including:

• The nature of the asset
• The method of finance
• The length of period of ownership
• Frequency or number of similar transactions by the same person
• Supplementary enhancement work on or in connection with the property realised
• The circumstances that were responsible for the realisation
• Motive behind acquisition and sale
• Whether income arises

The authors of this article have seen the Revenue on occasions suggest that an occasional sale of wine give rise to a trading activity. In one instance, the taxpayer and his wife had sold a small part of their very substantial wine investment for the first time in ten years. The Revenue were rebuffed and may have been deterred by the prospect of a claim for a trading loss by the write down on some of the wine stocks.

Clearly wine is dealt in and will not give rise to income and yet it is unlikely that supplementary work will be carried out on it prior to sale. There is also the point that unlike other ‘non income producing assets’ such as paintings, there is no ‘pride of possession’ in that the wine is not usually on display. For the rest of this article, we assume though that the wine owner takes the necessary steps to avoid being treated as a dealer in wine, with trading status and consequent exposure to income tax.

Where the profits made on wine sales are within capital gains tax, the investor will normally enjoy the current 28% rate and the Capital Gains Tax (CGT) annual exemption of £10,100. More importantly there may be no exposure to CGT due to the following exemptions:

• Wasting assets (TCGA 1992 s45) and
• Chattels (TCGA 1992 s262)

It is these two reliefs that merit detailed consideration by the wine investor together with views made originally by the Revenue in the Tax Bulletin back in 1999 and now found as RI 208. 

Is wine a wasting asset?
Section 44 (1) TCGA 1992 defines a ‘wasting asset’ as being an asset with a predictable life at the time of acquisition not exceeding 50 years. It then goes on to state that:-

‘Life’, in relation to any tangible moveable property, means useful life, having regard to the purpose for which the tangible assets were acquired or provided by the person making the disposal.

Section 45 (1) then states that no chargeable gain should accrue on the disposal of an asset which is both tangible moveable property and a wasting asset. Clearly there is every incentive for the wine investor to demonstrate that his wine investment had a useful life of 50 years or less at acquisition.

Example – Tim sells 200 cases of Pinot Grigio for £37,000 in March 2010 which he bought for £10,000 in 1995. The gain of £27,000 is exempt from CGT by virtue of TCGA 1992 Section 45 (1) on the basis that it is thought that the wine had an estimated life in 1995 of 50 years or less. 

R1 208 focuses on the term ‘useful life’ in some detail. It readily accepts that cheap table wine is clearly a wasting asset as it will turn to vinegar (!) within a relatively short period even if unopened. On the other hand Port and other fortified wines will be regarded as having a longer life and hence will not be wasting assets. However, between these two extremes, there are a number of permutations where perhaps the wine market and general taste alters over time.

It may therefore be very difficult to adjudge whether the wine will be suitable for drinking beyond the age of 50 years from acquisition. Of course even if it is suitable for drinking, one needs to look at what its expected useful life was going to be -  not what its finite  existence in a drinkable state could be.

RI 208 concludes on this point with the statement: 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 which are kept) for substantial periods sometimes well in excess of 50 years.

A taxpayer here who is uncertain of the position on a wine disposal will need to self assess and as ever look to make full disclosure on his tax return of the types of wine and have expert evidence (perhaps from his wine broker) on hand about the expected useful life. However in all probability the vast majority of wine investments are likely to be wasting assets.

It should be noted of course that the 50 year test is applied at the date of the current owner’s acquisition rather than original production. A review of the internet shows that it is possible to buy wines with an 1811 vintage for example but it is the expected useful life from the date of acquisition now that counts.

Example – Stan buys 30 bottles of d’Yquem 1958 in 2006 for £20,000 and disposes of them for £80,000 in 2010. He claims exemption under Section 45 (1) on the basis that at the time of the acquisition in 2006, the wine did not have an expected further useful life of 50 years or more.

It could, of course, be that the wine investment is realised at a loss and there may be some incentive for the taxpayer to assert that the wine did have a useful life of more than 50 years. Where the facts could support this, it might even be possible to assert that this loss was attributable to a trading activity thus enabling a tax loss to be created for the purposes of income tax. However this would mean quite possibly that the owner is tainted with trading status, thus meaning future wine profits would be subject to income tax.

It has been suggested that a capital loss might arise on the drinking of wine as the consumption constituted “the occasion of the entire loss, destruction, dissipation or extinction of an asset” (TCGA 1992 s24(1)) and hence a negligible value claim could validly be made – maybe a test case will hit the House Of Lords shortly!

Chattels Exemption
If advantage cannot be taken of the wasting asset exemption, it may still be possible to utilise this useful relief. Basically where tangible moveable property, such as wine, is sold for proceeds of less than £6,000, TCGA 1992 s262 states that a chargeable gain will not arise. The policy objective behind the exemption is presumably to prevent a taxpayer having to make detailed calculations every time any small asset is disposed of.

However, it may assist the wine investor in making small tax effective disposals to take advantage of the exemption. As is well known though, to prevent tax mitigation by fragmentation of a disposal of related chargeable assets, the proceeds of a sale of two or more assets will need to be aggregated by virtue of s262 (4) where they form part of a set of articles owned by an investor and disposed of to one purchaser or to persons who are acting in concert or are connected parties.

The Revenue’s normal practice according to RI 208 will be to aggregate disposals of wine investments where the bottles are essentially ‘similar and complimentary’ (where the wine in them is produced from the same vineyard in the same vintage year) and their value together exceeds the total of individual values. 

Potential inheritance tax benefits?
Upon death, inheritance tax (IHT) of course will be charged on wine investments but the authors could find no basis for statements on two wine broker websites that provided proof of purchase was retained by the investor, the value of the wine for IHT purposes would be based on original cost rather than any appreciation in value.

Overseas aspects
Even though wine investors in the UK may enjoy significant tax benefits, probably unintended by policymakers, the situation is different abroad. There are some countries of course like New Zealand where there is no CGT and hence disposals of wine investments by residents there will be tax free. Our New Zealand correspondent recounts how he inadvertently drank a bottle of expensive Penfold wine unfortunately not realising he could have sold it for a tax free gain. There should happily be no tax on gains on wine investments in other wine producing countries such as Italy and Chile. In the USA we understand that wine investments will rank as a ‘collectible’ and any gains will be subject to a preferential 28% Federal Tax rate.

Concluding thoughts
Compared with other tax efficient investments, wine enjoys favourable treatment. One significant advantage is that it can be liquidated, one way or another, quickly and there are no penalties for early encashment, unless we of course include perhaps hangover effects.

'Wine portfolios' are marketed by wine brokers with intricate investment patterns available tailor-made to clients' needs and expectations, the most interesting ones quite cleverly marketed as 'tax free lumps sums' maturing at a specific time in future. Many wine brokers offer storage for wine within UK Customs controlled Bonded Warehouse where until the wine is released, no VAT or excise duties need be paid.

French vintages, particularly Bordeaux, seem to lead in fine wine investments rankings with labels such as Mouton Rothschild, Lafite, Latour, Haut Brion, Margaux, followed by Harlan representing California and Henschke from Australia. With French Crus leading unsurprisingly for the French (but perhaps surprisingly from our government point of view) there is no taxation on sales of fine wine investments in France. Top vintages of the above labels enjoy a life span of at least 20 years and thus are still well within the UK wasting assets exemption noted above. So fine wine seems a very fine investment indeed!

 

About Creaseys
Established for more than 150 years, Creaseys LLP is one of the top 100 firms of accountants in the UK. There are nine partners and approximately 90 support staff based at offices in Lonsdale Gardens, Tunbridge Wells, Kent. The practice has two specialist divisions: Corporate & Business and Private Clients.

1 August 2010