The tax year end is in sight, but there’s still time to gain wine-fuelled tax benefits for this financial period.
For those tying up their financial loose ends for the current tax year, a quick reminder of the tax benefits of adding fine wine assets to investment portfolios could be valuable.
Tax benefits of investing in fine wine
- Unlike shares and property, Stamp Duty does not apply
- Profits are generally exempt from Capital Gains Tax (‘CGT’)
- Fine wine stored in bond does not trigger VAT or Duty charges
- Inheritance planning – fine wine can be used to transfer wealth
How does the CGT Allowance reduction influence wine investment in 2023?
The new tax year heralds a new development for investors regarding CGT. The annual allowance for CGT will be slashed by 50% next month from £12,000 to £6,000, and again to £3,000 in April 2024. This means that profits on even modest share sales will attract a 20% CGT liability once the Allowance has been deployed.
Fine wine is classified by HMRC as a Wasting Asset and accordingly any profits made from investing in wine are generally exempt. Everybody’s circumstances are different, and it is important to take professional tax advice. Exempt assets such as fine wine will have added appeal, in addition to the other benefits on offer.
The benefits of adding fine wine to your portfolio:
- stability during periods of volatility in financial markets
- growth performance that delivers an average 10% CAGR
- ability to hedge inflation as values generally rise with it
- investment-grade wine is a tangible ‘real’ asset with inherent value
- tax efficient
Estate planning and fine wine
Fine wine is useful for estate planning, providing an inflation-resistant asset that demonstrably protects wealth to transfer tax-efficiently to children and grandchildren. Fine wine does not escape Inheritance Tax but careful planning can potentially negate IHT, see our Report on Tax and Fine Wine for more details.
Do Budget Duty changes impact wine investment?
Chancellor Hunt announced an increase in Duty on alcohol to be in line with inflation (Retail Price Index), at 10.1%, in March 2023. The rise represents the largest increase in Duty in the UK since 1975. This has been poorly received by the Drinks Trade, already under pressure due to continued post pandemic pressures with inflation-driven production and supply costs.
The change in Duty comes into play on 1 August 2023 and some commentators suggest that this move will further fuel inflation. The shocking announcement that food inflation hit 18% in February, was influenced by food and drink prices in hotels and restaurants.
Fortunately, a rise in Duty does not affect investors who keep their fine wine in bonded storage. Investment wine should be stored in a specialist ‘tax storage facility’ where the wine is still treated as ‘off-shore’. VAT and Duty do not become chargeable until wine is removed from bond. Most wine investment transactions involve wine still stored IB, or physically off-shore to be shipped into Bond.
The benefits of In Bond storage:
- Correct management of temperature and humidity conditions to protect the quality and value of fine wine
- Minimal wine movement
- Provenance – a clear audit trail of wine ownership and location
- No tax obligations
Fine wine investments compared to ISAs
With UK inflation surprising forecasters and markets by rising again in February 2023 to 10.4%, up from 10.1% in January and the expected 9.9%, cash value is still seeing a high level of erosion. Tax-efficient investment products such as ISAs are traditional investments and important components of a portfolio.
Average returns from ISAs compared to fine wine – 1 year performance
Period | Average ISA - Stocks & Shares returns | Average ISA – Cash returns | Average fine wine returns |
Feb. 2022 - 2023 | -3.27% | +1.71% | +5.9% |
Feb. 2021 - 2022 | +6.92% | +0.51% | +23.5% |
Data source: Moneyfactscompare.co.uk: ISAs, Liv-ex.com: Fine wine
The research from Moneyfactscompare shows the one-year performances measured at the end of February 2022 and February 2023. In the previous year, between February 2021 and February 2022, those with their money in cash Isas only recorded an average 0.51% gain, compared to an average gain of 6.92% for stocks and shares funds. Compare this with fine wine’s average 23.5% returns recorded by the Liv-ex1000 index in the same period.
The year to February 2023 saw volatility in all markets. Fine wine maintained steady growth but key markets Champagne and Burgundy saw price drift in Q4 2022 and the start of 2023, suppressing one year performance measurement to 5.9% growth, still ahead of cash and shares ISAs.
On average over the past two years, those with stocks and shares ISAs have still done better than those with cash ISAs. However, it's worth pointing out that given recent double-digit inflation, it's likely that most investors and savers are still down in real terms.
Nobody would suggest alternative assets such as fine wine replace ISAs, rather they both have a place to diversify and optimise portfoliio returns and offer tax benefits.
There’s still time to add fine wine to your portfolio in the current tax year. For more information on the tax implications of adding fine wine to your investment portfolio, speak to your tax advisor. For the latest wine investment market information, see our March Report and talk to a member of our expert team on 0203 384 2262.