Countering inflation with collectibles

The headline rates of return, as well as the favourable tax treatment, could mean that passion assets and collectibles such as fine wine, rare whisky, classic cars, stamps, coins, jewellery, artwork and antiques could see additional levels of interest from investors in 2022.

The tax treatment of passion assets is particularly appealing. They do not tend to return dividends or other income streams, thus recent increases to the income tax rates on dividends are unlikely to bite. Rather, gains arising from disposals are likely to fall within the capital gains tax (CGT) regime and will usually benefit from the annual exempt amount for capital gains as well as current tax rates of as low as 10 per cent (the lowest since CGT was introduced in 1965).

Furthermore, tax exemptions are applicable to chattels and wasting assets, which includes many passion assets and collectibles, which are not available to most other traditional investment assets. Private cars, including vintage collectible cars, are specifically exempt from CGT, and many chattels with a limited lifespan are also exempt from tax.

As a general rule, assets that have a predictable lifespan of 50 years or less (known as ‘wasting assets’) are exempt from CGT. This includes some fine wines and whiskies that may not be drinkable in more than 50 years. The estimate of predictable lifespan is made at the time of disposal and takes a number of factors into account. Whilst exemption is beneficial for gains, it should be noted that losses arising are not available to offset gains on other disposals.

Assets that are not wasting assets may still fall within the beneficial CGT regime applicable to chattels. The rules are complex, but the disposal of a single chattel valued at no more than £6,000 is exempt from CGT, and chattels valued at up to £15,000 can benefit from alternative methods to calculate the gain or loss on disposal, lowering CGT charges.

While care must be taken to ensure that such investment activity does not extend to ‘dealing’ in passion assets, which is likely to constitute a trading activity subject to income tax, now may be a good time for investors to cash in on valuable tax exemptions.