The prospect of the Inland Revenue riding to the defence of wine lovers would seem an unlikely one, I’ll admit, but it may just be that the taxman has declared his hand as the scourge of the wine investor.

Have you spent a small fortune on wine recently in the hope of a great return on your investment? Were you lured by an investment fund, a broker, or, heaven forfend, a wine writer, promising that whatever else happened, your investment would be free of capital gains and inheritance tax? Because if so, you might be about to come a cropper at the hands of the Inland Revenue.

First Growth Hangover?

Until recently, wine investment has been considered a useful tax haven, but noises coming from the Revenue suggest that all may not be as plain sailing as had been assumed. The vast sums now being paid for ‘investment grade’ wines, notably the first growths of Bordeaux and their ilk, haven’t escaped the taxman’s attention.

The Revenue has made it clear that for Inheritance Tax (IHT) purposes, cellars will be valued not as cost price, as many brokers and advisers had seemed to think, but at the wine's value at the time of the taxpayer's death.

At the same time, if the Revenue is inclined to interpret what is or isn't taxable for Capital Gains Tax (CGT) purposes in its, rather than the investor’s favour, the issue is whether the wine is or is not ‘a wasting asset'. i.e. has a life expectancy of 50 years plus, in which case it is taxable.

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1. INHERITANCE TAX

The Inland Revenue has recently made it clear that the value of the wines for inheritance tax purposes will not be their cost price, as some brokers have apparently been advising their clients, but the value of the wine at the time of death.

According to the Inland Revenue (http://www.hmrc.gov.uk/cto/newsletter-aug10.pdf), ‘It has been brought to HMRC’s attention that information in the public domain indicates that for Inheritance Tax purposes wine cellars are valued at the purchase price rather than the value at the date of death. This is incorrect’.

Lay Me Down

‘Section 160 IHTA1984 states that for Inheritance Tax purposes the value of any property is the price it might reasonably be expected to fetch if sold in the open market at that time. Therefore it is clear that a wine cellar must be valued at its open market value for Inheritance Tax purposes at the time of the relevant occasion of charge’.

What constitutes ‘a wine cellar’ for the purposes of IHT?

According to the revenue, ‘it will depend on the facts and circumstances of the specific case - although a collection of wine that is liable to IHT does not need to be stored in a traditional 'cellar'. A wine rack containing wine that is valued above the threshold would also qualify’. It’s enough to drive distraught relatives to drink.

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2. CAPITAL GAINS TAX

INDIVIDUALS

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.

According to the Revenue, where bottled wine is purchased, each bottle is ‘a chattel’ for Capital Gains Tax purposes. Gains on selling chattels which are also ‘wasting assets’ are generally exempt from CGT so the first question is whether bottled wine is a wasting asset or not.

A wasting asset is one whose predictable life, from the point of view of the person acquiring it, does not exceed 50 years. Most wine isn’t considered a wasting asset because it simply doesn’t have a predictable life anywhere close to 50 years.

Badge of Pride

According to the Revenue, in these cases: ‘where the facts justify it, 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 of which are kept) for substantial periods sometimes well in excess of 50 years’.

Songwriter Chris ‘Lady in Red’ de Burgh announced in a recent interview with Decanter Magazine that he owned wines that were so valuable that he couldn’t possibly bear to drink them. ‘We all baulk at opening a case of the ’45 [Château Lafite]’ said de Burgh (and, we all do, don’t we). ‘It’s almost like taking down the Mona Lisa and putting it in the toilet’ said the man in red’.

Without realizing it, de Burgh may have handed a tax windfall to the Inland Revenue by declaring his intention to sell these valuable wines. ‘I didn’t buy them to sell but I’m going to sell them,’ says de Burgh. It makes no difference to the Revenue that when he acquired them, whether by purchase or gift, it was his intention to drink them. What he’s now saying is that they’ve morphed into potentially taxable investments.

So the Inland Revenue will tax de Burgh on them if they can show that the wines are not wasting assets, i.e. that they have a ‘predictable life’ of 50 years or more. And who could argue that a 1945 Lafite or a 1961 Latour doesn’t have a 50-year lifespan or more?

Well, Chris de Burgh could, as it happens. The light at the end of the tunnel is that the 'predictable life' of an asset is ‘from the point of view of the person acquiring it’, in other words the wine’s condition AT THE TIME they acquired it. According to the Revenue: ‘you have to look at the position as it was when the asset was originally acquired by the person making the disposal. In other words, it depends on the condition of the wine when it is acquired’.

An Unstained Reputation

There’s difficulty number 1. How does the revenue ascertain what the condition of the wine was when it was acquired?

The Revenue claims that ‘The question of the predictable life of a bottle of wine is an objective one to be answered by reference to the evidence at the time the bottle was acquired by the person now disposing of it. The person making the acquisition isn’t entitled to make an arbitrary decision which is final and conclusive in all circumstances. The matter has to be determined objectively’. Easier said than done however.

More to the point, the ‘predictable life’ period runs from when the person acquired the wine. This is confirmed by advice given by Richard Holme and Ola Majcherczyk, from the Tunbridge Wells-based accountants Creaseys, who say, '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'. They give the following (admittedly rather exaggerated) 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’ or ‘predictable life’ in some detail. The Revenue readily accepts that ‘cheap table wine is clearly a wasting asset as it may turn to vinegar within a relatively short period even if unopened’. On the other hand, according to the Revenue, ‘Port and other fortified wines’ that are ‘generally recognised to have a very long storage life’, are at the other end of the spectrum.

Between the two extremes, the position is vague. The Revenue’s position is that ‘there are a number of fine wines which are quite drinkable after a substantial period although of course the taste alters over that time. With these, the basic consideration is whether the wine has turned to vinegar or has merely matured’.

There’s difficulty number 2.

As Creaseys point out: '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'.

So the position is far from clear cut. All the influences on a wine's potential life, i.e. differences between vintages, provenance, the condition of a wine and so on are factors that may have an effect on the definition of 'the useful life' of a wine so as to affect the issue of whether or not it's taxable as a non-wasting asset.

The Case for the Defence

As The Antique Wine Company’s Stephen Williams points out in an article on wine investment: ‘If we go back to basics, there are just two main influences on how a wine will taste. The first is the winemaking process which will be affected by the vintage, terroir, selection and assemblage – as well, of course, as the winemaker’s skill. But once that wine has been bottled, the only thing that can positively or negatively influence is the quality and consistency of is its storage. Unless you really know where and how the wines have been kept – throughout their history, it’s often impossible to tell – until you pull the cork. By which time it is far too late to do much about it’.

Let’s not forget too the issue of whether wines are made to be drunk younger today. Increases in yields, higher alcoholic content, lower acidity and are all factors that affect the structure of today's wines, and it may well be argued that what kept a 1929 red Bordeaux going strong for 50 years plus has changed today. In fact investment funds and advisers tend to be silent on this point perhaps because longevity is the sine qua non of wine investment for them and perhaps they don't want to shout too loudly about the capacity of today's top wines to age for as long as their counterparts from an earlier era.

It’s all very well then for the Revenue to say that ‘wine is not a wasting asset if it appears to be fine wine which not unusually is kept for substantial periods sometimes well in excess of 50 years’, but you simply can’t apply that rule across the board because the vagaries of vintage, winemaking technique and provenance will combine to have a significant effect on the issue of what a wine’s 'expected useful life' might be.

There is at least an exemption of sorts: an exemption for a bottle of wine that doesn't exceed the annual limit. According to the Revenue, ‘If a particular bottle of wine is not a wasting asset, then any gain accruing on its disposal may nevertheless be exempt where the disposal proceeds for that single bottle do not exceed £6,000, Section 262(1) TCGA'.

So far so good but note that even that exemption may not apply.
An Englishman's Home is His Tax Haven?

'Where however, a number of bottles are sold to the same person in one or more transactions, then the question might arise as to whether the bottles themselves constitute a "set". If they do, then the £6,000 limit would apply to the overall sale proceeds rather than the price fetched for any individual bottle: Section 262(4). This is a question of fact and would depend on:

(a) 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

(b) whether the bottles are of greater worth when sold collectively than when sold individually.

Note the ‘and’ here. Two bottles of Château Lafite that each sold for less than the annual limit would appear to fall within the exemption if it can be demonstrated that selling the two together doesn’t increase their value as a set.

One final point. Note that the Revenue’s advice only refers to ‘bottled wine’. Is buying en primeur therefore exempt because the purchaser at the time of the contract is not buying wine in bottle but only futures? The Revenue is equivocal on the point, only saying ‘We have not had occasion to form a view as to whether different or further considerations might apply were the bottles to have been acquired through the en primeur process’.
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COMPANIES

Investment funds and their ilk, since they state as their purpose that the buying and selling of wine is for investment purposes, don’t fall under the ‘wasting asset’ provisions (see below) but under income or corporate tax provisions.

The relevant article on wasting assets ‘is written on the premise that any transactions by private individuals involving the acquisition and disposal of such wines are not regarded as "trading" or an "adventure in the nature of trade" within the charge to Income Tax under Case I of Schedule D’……

The guidance in the business Income Manual covers this:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20051.htm but is suitably vague.

According to Creaseys, the Revenue has been known on occasions to suggest that an occasional sale of wine may give rise to a trading activity. Worth noting, but unlikely to be invoked in one-off cases. Regular cashing-in of assets might be viewed differently however.

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OVERSEAS

According to the accountants Creaseys, ‘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’.

Richard Holme and Ola Majcherczyk of Creaseys LLP Tunbridge Wells can be contacted on 01892 546546 or email: richard.holme@creaseys.co.uk

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Appendix 1

VALUATION FOR IHT

http://www.hmrc.gov.uk/cto/newsletter-aug10.pdf

It has been brought to HMRC’s attention that information in the public domain indicates that for Inheritance Tax purposes wine cellars are valued at the purchase price rather than the value at the date of death. This is incorrect.

Section 160 IHTA1984 states that for Inheritance Tax purposes the value of any property is the price it might reasonably be expected to fetch if sold in the open market at that time.

Therefore it is clear that a wine cellar must be valued at its open market value for Inheritance Tax purposes at the time of the relevant occasion of charge.

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Appendix 2

WINES & SPIRITS: THE CAPITAL GAINS TAX TREATMENT

http://www.hmrc.gov.uk/bulletins/tb42.htm#anchor19131

We have received a number of enquiries recently about the Capital Gains Tax treatment of bottles of wines, particularly "fine" wines, and spirits. This article sets out the position for transactions where the correct charge is to Capital Gains Tax. It is written on the premise that any transactions by private individuals involving the acquisition and disposal of such wines are not regarded as "trading" or an "adventure in the nature of trade" within the charge to Income Tax under Case I of Schedule D.

Where bottled wine is purchased, each bottle is a chattel for Capital Gains Tax purposes. As gains on the disposal of chattels which are also wasting assets are generally exempt from Capital Gains Tax, Section 45(1) Taxation of Chargeable Gains Act 1992 (TCGA), then the first question is whether bottled wine is a wasting asset or not.

For Capital Gains Tax purposes a wasting asset is one whose predictable life, from the point of view of the person acquiring it, does not exceed 50 years, Section 44(1) TCGA. Whilst this definition would clearly apply to cheap table wine which may turn to vinegar within a relatively short period, even in unopened bottles, our view is that it would certainly not apply to port and other fortified wines which are generally recognised to have a very long storage life.
Between these extremes, there are a number of fine wines which are quite drinkable after a substantial period although of course the taste alters over that time.

With these the basic consideration, in our view, is whether the wine has turned to vinegar or has merely matured. Of course in practice, most wine is drunk well below the age of 50 years and in that sense it is very difficult to consider the issue in isolation. However, where the facts justify it, 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 of which are kept) for substantial periods sometimes well in excess of 50 years.

If a particular bottle of wine is not a wasting asset, then any gain accruing on its disposal may nevertheless be exempt where the disposal proceeds for that single bottle do not exceed £6,000, Section 262(1) TCGA. Where however, a number of bottles are sold to the same person in one or more transactions, then the question might arise as to whether the bottles themselves constitute a "set".

If they do, then the £6,000 limit would apply to the overall sale proceeds rather than the price fetched for any individual bottle, Section 262(4). This is a question of fact and would depend on:
6+
(a) 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
(b) whether the bottles are of greater worth when sold collectively than when sold individually.

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