Capital Gains Tax tends to be typically associated with profits made on shares or property. But why these items and not others? Peter Webb, our Head of Tax Advisory, shares some useful advice about dealing with family heirlooms and personal possessions when it comes to tax.
Being in the business of tax advice for over thirty years has created some pretty memorable enquiries. Some years ago I took a rather breathless call from a client who was out horse riding. He needed advice about whether to sell his cars, horses or shares to raise some cash. I advised that if he sold his car collection or horses, he wouldn’t face any UK Capital Gains Tax (CGT) but if he sold his shares he would. In the end he opted for the latter and paid the tax; he just couldn’t bear to part with his horses or cars.
CGT and cars (and horses!)
So why do you pay CGT when you sell shares but not when you sell a vintage car? What’s the difference? The short but rather technical answer is that your car, even if it’s a valuable classic, is classed as a “wasting asset” – an item with an expected useful life of less than 50 years. The same concept applies when it comes to cars and road tax – you have to pay it unless your car is more than 40 years old; then it becomes exempt. Yet if you’re buying and selling cars to make a profit, different rules apply and tax is due on any profits. A horse is also considered to be a wasting asset and so the same rules apply to CGT unless, again, you’re buying and selling horses to make a profit.
CGT and watches
Recently, I was gifted a beautiful vintage watch by my father-in-law. But as I was sharing my thanks the professional in me wondered whether he’d face a tax bill on his thoughtful gift. The general rule is that if you make a gift to someone who isn’t your spouse, civil partner or a qualifying charity, CGT might apply, but only if the item is more than £6,000. This applies to any chattel – the word used to describe personal possessions including items of household furniture, paintings and antiques, cars, motorcycles and so on. So, if you make a gift it’s important to understand the market value of the asset when you pass it on; this determines whether tax is due or not.
In my own case, the value of the watch was less than £6,000 so no tax had to be paid. But what if the watch had been worth more? Some vintage watches are now worth far more than their original cost. Thankfully, for UK tax purposes, a watch is regarded as a machine with an expected useful life of less than 50 years. Any gain made on disposing of the watch is therefore exempt from CGT. However, just like cars and horses, if you’re buying and selling watches to make a profit, you’re likely to be charged to tax on any gains you make.
Of course, outside of these rather specialist allowances, CGT does apply in other areas, and can carry a nasty sting. This has been exacerbated by the reduction in the CGT allowance from April 2023 – it’s now half of what it was last year and may be targeted by the government again in years to come. So, if you are realising any gains on shares, selling a property for a profit or enjoying dividends on other investments and funds, beware of the CGT bill which could face you. CGT can also apply if you transfer assets outside of your Estate; if you are planning to do so, then it’s important to seek expert advice.
Head of Tax Advisory