Alternative assets

Classic cars

Classic cars have long been considered both a passion and an investment for enthusiasts. From their aesthetic appeal to their potential for value appreciation, classic cars offer a unique opportunity for investors. Understanding their taxation nuances is critical to making informed decisions. This article explores the tax treatment of classic cars, focusing on income tax, Capital Gains Tax (CGT), and Inheritance Tax (IHT) while highlighting key factors to consider when navigating these rules.

Income tax

For investors in classic cars, one key concern is avoiding classification as a trader. If HMRC determines that car transactions constitute trading, profits could be subject to income tax and National Insurance.

In general, income tax is charged on the profits of a trade, profession or vocation. It can be difficult to make the distinction between what is a trade and what is not. For investors, it is important to ensure that they are not classified as engaging in a trade to avoid their profits being taxed at significantly higher rates of income tax (compared with CGT paid by investors).

Tax savings are up to 21% of the gain for an additional rate taxpayer or 16% for a higher rate taxpayer (the calculation for a basic rate taxpayer is more complex but will be between 2% and 16% depending on the taxpayer’s other income and the amount of gain on disposal). The courts have set out nine badges of trade that it uses to make the distinction. These ‘badges’ will not be present in every case and of those that are, some may point one way and some the other. The presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade. The weight to be attached to each badge will depend on the precise circumstances.

The following badges of trade are especially relevant to classic car investors:

Number of transactions:

A single purchase and sale of a car, having owned it for several years, is unlikely to indicate trading. However, frequent purchases and sales may point towards a trade. A purchase and subsequent sale of one classic car after a number of years may well be considered to not satisfy this badge, but an investor who purchases and sells items on a regular basis may well fall within the scope of conducting a trade.

Changes to the car:

Restoring or repairing a car to enhance its value before selling may suggest trading. However, maintaining a car in good condition without significantly altering it supports the case for non-trading activity.

Was the car repaired, modified or improved to make it more easily saleable or saleable at a greater profit? If an asset needs to be significantly repaired or restored in order to allow for its sale, this may point towards the existence of a trade. The purchase of a classic car in poor condition, and its subsequent restoration for sale would likely count towards existence of trade whilst the purchase of a classic car in good condition, and maintenance over a period to retain its value is less likely to indicate trading.

Time between purchase and sale:

Trading stock will normally, (but not always) be sold quickly. The intention to resell an asset shortly after purchase will support trading. However, an asset held for a significant period of time is much less likely to be a subject of trade as it allows for appreciation of value and is more indicative of an investment.

Source of finance:

Using loans or financing to purchase a car, especially with high interest requiring quick repayment, can indicate trading.

The method of acquisition:

An inherited asset being subsequently sold is unlikely to form part of a trade. If purchased, the market in which it is purchased, or correspondence leading up to the purchase can suggest whether the asset was purchased for trading or investment purposes.

The nature of the asset:

If the asset offers advantages to the purchaser beyond the realisation of profit on sale this can indicate that a trade does not exist. Owning and using the car (e.g. displaying it or driving it for leisure) supports the argument that it is not part of a trade. HMRC specifically highlights within their guidance that classic cars can fall within this classification as are frequently acquired for the pleasure that ownership brings to the owner.

Example scenario:

Investment activity: An investor purchases a restored vintage car, drives it occasionally over a decade, and sells it at a profit. This is likely to be viewed as a non-trading activity, and the profit would be subject to CGT, not income tax.

Trading activity: An individual buys several unrestored cars, restores them, and sells them quickly for a profit. This activity is more likely to be classified as trading and subject to income tax.

If you are unsure whether your car transactions might be classified as trading, seek advice from a tax specialist to ensure compliance and avoid unexpected liabilities.

CGT: Complete exemption for cars

One of the most attractive aspects of investing in classic cars is that a motor vehicle constructed (or adapted) to carry passengers enjoy a complete exemption from CGT under UK law. It is statute law that such cars are exempt from capital gains tax. This means that whilst gains are not taxable, losses are similarly not deductible from gains accrued in other assets to reduce the CGT due on these gains.

While gains are tax-free, losses on car sales cannot be offset against gains from other assets.

Specific vehicles such as racing and single seat sports cars, commercial vehicles and tax cabs are not covered by the above exemption, although they may otherwise be exempt by virtue of being a chattel.

Example scenario:

An investor buys a classic car for £50,000 and sells it for £100,000. Subject to the badges of trade referred to above, the £50,000 profit is entirely CGT-exempt.

Classic cars are ideal for long-term investments where significant appreciation is expected. Investors can focus on building value without worrying about CGT liabilities, unlike other assets like art or bullion.

VAT considerations for classic cars

VAT is typically not an issue for private individuals buying or selling classic cars. However, there are exceptions. VAT applies if a car is purchased from a VAT-registered seller and is charged at 20% of the purchase price. Standard rate is still charged on sales even if the dealer is accounting under the margin scheme.

If you sell classic cars as part of a business and exceed the VAT registration threshold (currently £90,000 of taxable sales in a 12-month period), VAT must be charged on sales.

To avoid VAT complications, you should ensure that car purchases and sales remain separate from any business activities.

Are classic cars an attractive investment?

For those investors willing to explore assets not usually forming part of investment portfolios, branching out can offer tax advantages at various stages through the transaction lifecycle.

Classic cars are highly advantageous in their CGT treatment due to being totally exempt (though care needs to be taken to avoid being treated as conducting a trading activity, especially in the buying and selling of classic cars where restoration of the car is required before sale).

No CGT liability, allowing investors to enjoy tax-free gains.
While subject to IHT, effective estate planning can help mitigate liabilities.
Investors should carefully manage activities to avoid classification as a trader for income tax purposes.

Classic cars can play a valuable role in a diversifying investment portfolios. However, as with any investment, careful planning and specialist advice are essential to optimise outcomes and avoid pitfalls. Should you have any concerns or questions for the team at Price Bailey, please contact one of our experts.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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