Investing in wine is something that people have always done, whether it is because they start off buying with a casual interest which develops into something more, or (and especially in these turbulent times) they make a conscious decision to avoid the stock market and try something different to try to beat the rather low yields on more traditional investments.
In more recent times there has been a surge in opportunities for casual investors to become involved in, and a number of investment houses now offer the opportunity for investing in wine.
But before we get caught up in the excitement of the wonderful world of wine, it is easy to forget that the tax consequences of buying, selling and keeping of wine need to be considered, especially as one of the persistent myths about wine is that it is “tax free” to invest in.
When we buy wine in a retail setting, VAT and duty is applied and this affects what you pay at the till. The current rates of Duty on most standard still wines (ABV of between 5.5% and 15%) is 297.57 pence per litre. At present, the rate applied to sparkling wines is 381.15 pence per litre. From February 2023, the rate applied to sparkling wine will decrease, but some wines with higher alcohol levels will see an increase in Duty. This is a fixed rate on all wines, irrespective of the cost of the wine. This is therefore a salutary reminder that, on a cheap bottle of wine, a huge percentage of the cost is tax and Duty. But we are not talking about those kinds of wines today!
The applicable VAT rate on all wine is 20%. As the price of the wine increases, the VAT will increase proportionately.
If you buy in Bond (an HMRC approved storage facility), you defer the payment of both the VAT and the Duty until such time as you decide to take the wine out of the Bond to either enjoy or remove it to sell it outside of Bond. The amount of VAT and Duty you pay will be charged on your original cost of the wine, but at the VAT and Duty rates that apply at the time you take delivery. These could be higher or lower that when you made the original purchase, as we have a Budget every year (or more often!) and alcohol Duties are one of those taxes that do fluctuate from time to time.
Of course, if you sell the wine whilst it is still in bond, then the VAT and Duty becomes the purchaser’s responsibility to pay if and when they take the bottles out.
Selling wine is a more complicated issue. In most cases, HMRC will agree that wine falls into the Capital Gains Tax (CGT) regime. As a result of that, certain exemptions can be invoked to make the selling of wine very tax efficient when compared to investing in the stock market, for example.
The two most useful exemptions are the Wasting Assets Exemption and the Chattels Exemption, and if all else fails then you will at least be able to use your annual exemption (currently £12,300 per annum) to reduce some of the tax. Anything not covered will attract CGT at a rate of 20% on the gain. The gain in this context will be the difference between what you sell it for and what you paid for it, less any allowable costs, such as the costs of sale and purchase – although note that it is unlikely you will get relief for storage costs in this context.
Wasting Assets Exemption
A Wasting asset is something that is expected to last less than 50 years from the time you acquire it. Therefore, if you purchase a wine that is not expected to still be drinkable in 50 years or, which is already of sufficient age that it won’t last a further 50 years from the time you purchase it, that wine can be classed as a wasting asset, and like most cars for example, will not attract CGT when you sell it. However, some fine wines can be expected to last 50 years or more from the date of purchase, especially if bought En Primeur (i.e. direct from the Producer, prior to the wine being bottled), and those wines will not be wasting assets. Any gains on those will be subject to normal CGT rates, unless they meet the Chattels Exemption.
If the wine is not a wasting asset, it might still be considered a Chattel. A Chattel is any tangible, moveable asset worth less than £6,000, and Chattels are CGT free. This exemption will cover certain wines, but there will always be the most valuable wines to consider, and in those circumstances, CGT will apply at normal rates. A further risk is that a Chattel might not just be a single bottle. If the wine is sold as a case or a collection to the same person, then HMRC may seek to value the whole of the case/collection as a single item (especially if the case or collection is worth more than the sum of its parts) and if the total value is more than £6,000 then the exemption will be lost.
It is also possible to sell enough wine for it to become a trading activity, in HMRC’s opinion. When that happens, gone are the exemptions afforded by the CGT regime and you fall into the realms of the much less forgiving income tax regime. Income tax rates range from 20% – 45% of your profits (depending on your other income) and National Insurance Contributions (NIC), now at an increased rate of 10.25% for the self-employed will also apply. Whether you are trading or not is a nuanced issue. Clearly if you open a bottle shop and sell to the public, you will be trading. But in HMRC’s opinion at least, this is not the only mark of someone who is trading, and it is something you will need to take specific advice on.
In this context, by “keeping”, we mean retaining the wine until your death. Very simply put, if you still own the wine when you die, the value will need to be taken into account when calculating the value of the estate, and, depending on what else you may have, is likely to be subject to Inheritance Tax (IHT) at a rate of 40%. Again, the value may be by bottle, but if you have a collection which includes any sets and the value of those sets is worth more than the total sum of the bottles, that will be the value that needs to be considered when working out how much tax your estate will need to pay.
If you prefer to give away your collection during your lifetime, providing you survive seven years from the date of the gift, the value of your collection will escape IHT, but a gift is treated as a disposal at full value, which may mean that CGT applies, as above. Alternatively, you could just drink it, solving both the CGT and IHT issue, but sadly not wiping out the Duty or VAT, if you have been storing in Bond.
If you would like to discuss more about the potential tax consequences of your wine collection, please contact Michaela Lamb, a Private Client Tax Partner at CBW, as well as WSET qualified wine enthusiast and one of the founding members of CBW’s staff Wine Club.