2021 is going to be a challenging year for many investors and to protect against the risk of intense market volatility a lot of investors are diversifying their investment portfolios. One of the alternative asset classes which seems to be fairly resilient in these turbulent times is fine wines. Both in the financial crisis of 2007/2008 and also at the start of the pandemic in March 2020 the Fine Wine Index that tracks the prices of 1,000 top performing bottles dipped by 0.6% and 4% respectively in contrast with other asset classes which plunged from anything from 25% to 38.5%. Over the last ten years, the investment growth in fine wines has increased by 200% and if you had invested £100 in the fine wine market in 1952 your investment would now be worth £420,000. The same amount invested in the Stock Market would now be worth a modest £100,000. Whilst such investments can be tax efficient, there are a number of key considerations which need to be kept in mind. There is also a question of what should happen to your wine collection on your death.
Wills and Inheritance Tax
If you haven’t got around to drinking it before you die, your executors would need to consider what value (if any) attaches to your wine collection. For Inheritance Tax purposes, HMRC has now made it clear that the value of the wines form part of your estate. This should be the value at the time of your death and not the value at the time of purchase. In other words, it should be treated like any other assets of the deceased’s estate. The collection of wines should be valued in accordance with Section 160 of the Inheritance Tax Act 1984 as the price the wine might reasonably be expected to fetch if sold in the open market.
The other consideration is, of course, who should inherit your wine collection. Will your intended beneficiaries have the same passion for wine as you do or is it better for it to be sold or donated to another collector? The most straightforward option is to leave a specific gift of your wine collection in your Will to named beneficiaries. Like any other expert collection, unless the executors themselves have a detailed knowledge it is sensible to leave with your Will an appropriate inventory with notes as to quality, storage history and provenance otherwise your wine collection could be unappreciated or undervalued.
If the wine is to be sold, then your executors may consider a sale by specialist auction. Again, if you have a relationship with an auction house or wine dealer then it would be worth making a note of content detailing in order to point your executors in the right direction as they themselves may not know where to start.
Capital Gains Tax on Wine
So, what would be the position if you decide to sell a bottle or two of wine during your lifetime rather than keep or drink it? The tax to consider on the disposal of any asset during your lifetime is Capital Gains Tax (CGT). HMRC regard that any bottle of wine is a chattel and will be subject to CGT unless it is classed as a wasting asset. This is an asset with a predictable life, at the time of acquisition, not exceeding 50 years. For everyday wines that you might purchase in a supermarket, there is no question of it having a predictable life beyond 50 years and so CGT is not an issue. However, a fortified wine designed to withstand significant ageing, such as premium port, probably does have a predictable life beyond 50 years and so CGT becomes a factor.
The grey area comes with fine wines which might have the capacity to age for half a century but are likely to be consumed before that date. HMRC’s statement says that ‘where the facts justify it, we would normally contend that wine is not a wasted asset if it appears to be fine wine which is not unusually kept (or some samples of which are kept) for substantial periods sometimes well in excess of 50 years! The question of the predictable life of a bottle of wine is objective and is to be answered by reference to the evidence at the time the bottle was acquired by the person now disposing of it. A number of factors need to be considered including the vintage, terroir, provenance and storage conditions at the time or purchase. To that end, keeping the relevant records when the wine is purchased is essential.
CGT is not payable if on the sale of wine which is not considered to be a wasting asset, the gain made since acquisition is less than £6,000. However, if a number of bottles are sold to the same individual, HMRC may regard this as a set and then only one £6,000 exemption will apply to the overall sale proceeds. This would apply when the bottles being sold are ‘similar’ and ‘complimentary’, for example, produced by the same vineyard and in the same vintage year and when the bottles sold together are of a worth greater than when sold individually.
If you are dealing in fine wines, then CGT treatment will not apply and instead the profits will be subject to income tax as this is a trade and it would be regarded as trading profit. To determine whether you are investing or trading you need to consider what is known as the ‘badges of trade’.
Collecting fine wines like other forms of collecting can be fun and rewarding but it is beneficial to take proper legal and tax advice on disposals during your lifetime and on your death.