What a waste

Racks of wine in shop
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I have just discovered two interesting things.

Firstly, ‘Raise Your Glass: Wine Investment and the Financial Crisis’, a study by Swiss economists Philippe Masset and Jean-Philippe Weisskopf, has shown that over the 13 years between January 1996 and January 2009 an index of first-growth Bordeaux wines outperformed the Russell 3000 Index of US shares. Over the period in question, the return produced by the fine wine index was over 500%, compared with just 50% for the Russell Index.

Secondly, according to Liv-ex, the London-based electronic trading platform for fine wine, there is a very close correlation between fine wine prices and the world-wide number of billionaires. An argument for communism if ever there was one.

While investment in wine has increased in popularity, this has not dispelled the widely-held misconception that any gain made when wine is sold is always tax-free. In point of fact, for a UK taxpayer, any gain will not be taxable if the wine is not held as trading stock and is a ‘wasting asset’. And there’s a separate exemption for disposals of tangible movable property where the consideration is less than £6,000. In applying the £6,000 exemption, special rules apply for assets forming part of a ‘set’.

So what is a ‘wasting asset’ (leaving aside the layman’s interpretation that a bottle of wine is certainly an asset, but the wasting part just means not drinking it)?

In the case of tangible moveable property, such as wine, a wasting asset is one whose predictable useful life does not exceed 50 years. So far as not obvious from the nature of the asset, the question of what is its predictable life must be determined on the basis of the facts known or ascertainable at the time when the asset was acquired by the person disposing of it, even though it will obviously only become relevant at the time the wine is sold at a profit.

It does seem a bit odd to consider how long wine is likely to be ‘useful’, but no such qualms could deter the wine experts at HMRC. In August 1999, they put pen to paper to set out guidance on when they would consider wine to be a wasting asset:

‘Whilst this 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.’

Which may sound well and good, but there is no basis in law for this pronouncement (and in some respects it is just plain wrong). Whether wine is a wasting asset has more to do with when you buy it, as opposed to its inherent keeping qualities (or, in the words of HMRC, ‘whether it has turned to vinegar’). For example, buying 1945 Château Lafite  now may well mean that you have bought a wasting asset, given the unlikelihood of it lasting until 2060, whereas if you bought 2009 Château Lafite en primeur …

Well, I think that’s interesting. Salut!


*** UPDATE – September 2010 ***

In August 2010 HMRC published a warning in its Newsletter for Trusts and Estates Practitioners (at page 5):

‘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 IHTA 1984 states that for Inheritance Tax purposes the value of any property is the price it might reasonably be expected to reach if sold in the open market at that time.

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

Sour grapes?

Tax lawyer specialising in business tax, SDLT and VAT

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