In recent years classic cars have moved into pole position as a potential asset class for investors, enjoying growth of 117 per cent over the past five years and 362 per cent over the past 10 years*. Given the recent proposals to ban the sale of petrol and diesel vehicles from 2040, it is possible that classic cars can only grow in rarity, popularity and value.
Potential investors may first want to consider how to spot a future 'classic' and, given the subjective nature of the investment class, it is important to buy for pleasure rather than being driven purely by a desire to realise an economic gain. Many unpredictable factors can play a part in determining whether a car becomes a classic, including culture, availability, even simply the passing of time and nostalgia. It is a passion and emotion-driven investment class, and as such difficult to forecast. Classic car enthusiasts may historically have been driven by their passion for all things motoring; it is only the explosion in value that means cars are now seen as a viable investment class.
Aside from the financial gain, there are tax implications and some advantages to investing in classic cars from the starting line. Where a UK resident taxpayer purchases a car outside the EU and brings the car to the UK permanently, import duty and VAT will normally be applied at 10 per cent and 20 per cent, respectively. However, imported cars benefit from a zero rate of duty and a reduced 5 per cent rate of VAT if they are of historic interest and are:
- at least 30 years old
- of a model or type which is no longer in production
- in their original state, without substantial changes to the chassis, body, steering, braking, transmission or suspension system and engine. Repairing and restoring is allowed, and broken or worn-out parts, accessories and units can have been replaced, provided the car is preserved and maintained in the historically correct condition.
These reduced rates are also available for certain cars under 30 years old provided HM Revenue and Customs (HMRC) is satisfied that the car has been used in a historic event, or where a racing car has achieved significant sporting success at prestigious or international events.
Additionally, cars must be accurately valued and not mis-described for customs duty purposes, whatever their state of preservation or roadworthiness is. Applying for a Binding Tariff Information from HMRC in advance avoids the heartache of a detained or seized vehicle. For example, a Chapman ex-racing car with racing heritage is worth more than a standard factory vehicle and hence the value for customs duty purposes may be higher.
Getting under the bonnet of classic cars
Cars are categorised as 'wasting chattels' for capital gains tax (CGT) purposes and are as such completely exempt from CGT on sale. Wasting chattels are items with a predicted life of less than 50 years, and plant and machinery (including privately owned cars) are always considered to be wasting chattels irrespective of whether the actual life of the asset exceeds 50 years, as would likely be the case for classic cars. The quid pro quo for this exemption is that any losses realised on sale (for example, where the car falls out of popularity or where considerable restoration costs have been carried out on a car) will not be allowable losses for tax purposes.
Serial classic car investors should note there is a risk that HMRC could consider that an individual is trading rather than simply investing in classic cars. If an individual is considered to be carrying on a trade, any profits realised on sales will be treated as business profits and potentially liable to income tax at up to 45 per cent. 'Trading' is not specifically defined by HMRC and determining whether an individual is carrying on a trade is not as black and white as the chequered flag. Each case is dependent on the specific facts and interpretation of the ‘badges of trade’, which are the five main indicators of whether a trade exists:
Overall, a combination of factors is likely to determine whether an individual is trading rather than one single factor. Taxpayers would, however, be advised to retain records of purchases and sales as evidence in the event of an enquiry by HMRC.
As well as losing the valuable CGT exemption, if a classic car enthusiast is considered to be trading they may also need to register for VAT. This could be beneficial if the ‘business’ is initially lossmaking or there is a significant VAT reclaim available. However, it will be necessary to prove that (despite losses) the individual is in business with a view to making a profit. The VAT margin scheme is available for cars that are obtained without VAT from private collectors or dealers also operating the margin scheme. This will ensure that VAT is only paid on the profit (rather than the full selling price). No VAT would be due on cars exported from the UK to a place outside the EU as such sales would qualify as zero-rated exports.
There are other ways that you can raise income from your classic car during its time around the track, for example by renting your cars for TV work, weddings and other special events, although this relies on the owner perhaps not being overly attached to their classic motor. The same rules would apply as above as regards whether this would constitute trading income, or merely income from a 'hobby'.
Investment performance of luxury asset class (to Q2 2017)
Classic cars can also lose money on sale, and cost investors dearly during ownership as specialist restorers may be required in order to return a car to its former glory. The UK is a centre of excellence for classic cars and vehicles are brought from all over the world to the many specialist restorers based in the UK. Whereas UK or EU-based resident individual investors will bear the full cost of the restoration, including VAT, it is possible for these services to be outside the scope of UK VAT where they are provided to non-EU-based car owners, or to an EU business entity. Normally, an import period of up to six months will qualify for full relief from import duty and VAT and this period can be extended in certain circumstances. In addition, renovation work is relieved on imports of non-EU cars that are restored in the UK and re-exported outside the EU, wherever the investor belongs.
Similarly, UK resident but non-domiciled collectors, ie those whose permanent home is outside the UK and who have previously claimed the remittance basis of taxation, can bring their classic cars, which may have been purchased with untaxed non-UK source monies, to the UK for repair without creating a taxable remittance provided that for the whole period the car is in the UK it is either in transit to or from the repair premises, or in the process of being restored. Collectors can also bring their cars (bought from untaxed non-UK funds) to the UK for exhibition or for enjoyment without a taxable remittance arising provided the car is not present in the UK on more than 275 days over the lifetime of the individual’s ownership of the car. An important point to note is that if a taxable remittance occurs, the total foreign income or gains invested in the car is treated as remitted; not just an amount equal to the value of the car. For example, if £100,000 of untaxed foreign income is used to purchase a car and the car is brought to the UK when it is valued at £80,000, the full £100,000 will be treated as remitted.
Heading towards the finish line
It is worth bearing in mind that the tax benefits of classic car ownership effectively end on death. For UK-domiciled or deemed domiciled individuals, inheritance tax (IHT) is chargeable at 40 per cent on their worldwide estate and on certain lifetime gifts of assets (for example, transfers to a trust established during their lifetime). For non-UK-domiciled individuals who have been resident in the UK for fewer than 15 years on their death (based on the proposed rules) UK IHT will only be applied to any UK 'situs' assets. For moveable assets such as cars therefore, it can be relatively easy for non-domiciled individuals to remove an asset from the UK IHT net. For UK-domiciled or deemed domiciled individuals, however, they may wish to consider selling or gifting their classic car collections in their lifetime in order to reduce their chargeable estate for IHT purposes (unless of course it is deliberately under-declared or mis-described in terms of value at export to avoid the correct valuation).
The most straightforward option may be to sell the car as, provided the CGT exemption is available, any gain would not be liable to tax. The cash proceeds could then be gifted (or spent!) and, consequently, provided the individual survives seven years after making any cash gifts, the full value received for the car will be outside the individual’s estate for IHT purposes. Gifts to individuals are ‘potentially exempt transfers’ (PETs) for IHT purposes, with the tax payable dependent on the number of years the donor survives after making the gift. If the donor dies within three years the gift will be fully taxable at 40 per cent, with the tax due tapered (at 20 per cen per year) where the donor survives between three and seven years.
Often owners become attached to their prized collections and may therefore prefer to keep much-loved classic cars within the family. If a classic car is gifted to a family member, no liability to CGT should arise provided the individual is not considered to be trading and provided the donor survives seven years after making the gift, it will be fully exempt from IHT.
Cars are categorised as 'wasting chattels' for capital gains tax (CGT) purposes and are as such completely exempt from CGT on sale
This is on the basis that any gift is an outright gift and that the donor does not reserve a benefit. If a benefit is retained (for example, the donor gifts a classic car to his son and transfers ownership, but continues to keep the car at his home and/or uses the car) the gift will fail and the asset will continue to be within the donor’s estate for IHT until the reservation is lifted. If the donor wants to continue using the car, it is possible to avoid 'reserving a benefit' by paying market rent to the new owner or, if they are happy to be a backseat driver, by having up to three lifts in the car per month!
If the owner really cannot bear to be parted from their favourite cars during their lifetime, such that it forms part of their estate on death, it may be possible to claim Modern Conditional Exemption from IHT. However, there are very strict criteria that must be met in order for an asset to qualify. Firstly, HMRC must consider the asset to be ‘pre-eminent’ for its national, scientific, historic or artistic interest or the asset must be part of a collection or group of relevant objects which, taken as a whole, appears to be pre-eminent for its national, scientific, historic or artistic interest. When determining ‘pre-eminence’, HMRC will consult a panel of appointed experts to determine whether the standard has been met.
Secondly, in order to qualify for conditional exemption the recipient of the car would need to give 'undertakings', including keeping the car permanently in the UK and allowing public access (for example, lending the car to a motoring museum for a period of time each year). If qualifying for conditional exemption seems more difficult than qualifying for a Grand Prix, classic car collectors could always consider leaving their collections directly to a museum. Where a collection is significant, individuals could consider establishing their own charitable foundation to receive the collection on their death. Such charitable bequests would be free from IHT and the owner would know their cars would be looked after and enjoyed by generations to come.
*Knight Frank’s Luxury investment index (Q2, 2017)
Susan Spash is a partner at Blick Rothenberg
