Factual information:
Capital Gains Tax (CGT) is a tax paid on the profit made from the sale of certain assets. It can apply to both UK and overseas assets, but there are notable exemptions and tax advantages that investors should be aware of especially when considering alternative investment classes like cask whisky.
Let’s dive into the essentials of CGT, how it affects traditional investments, and how cask whisky investments can provide a CGT free opportunity.
What Is Capital Gains Tax?
Capital Gains Tax is the tax you pay on any gain (profit) you make when you sell an asset that has increased in value. However, not all assets are subject to CGT.
Below, we explain each exemption in more detail, so you can make informed decisions about your investment strategies.
What asset classes are exempt from CGT?:
- ISAs / PEPs
Annual ISA Allowance: £20,000 per individual per tax year ISAs (Individual Savings Accounts) and PEPs (Personal Equity Plans) are both tax-efficient ways of saving and investing. While PEPs were phased out in 1999 in favour of ISAs, both offer significant benefits in terms of CGT.
- ISA (Individual Savings Account):
Any capital gains earned within an ISA are completely exempt from CGT. An individual can invest up to £20,000 per tax year into an ISA.
- PEP (Personal Equity Plan):
This was the predecessor to the ISA, available before 1999. While new PEPs are no longer available, PEPs and indeed ‘TESSA’s’ remain in place and are also exempt from CGT.
By maximising your ISA allowances, you can effectively shelter your investments from CGT. Please note that all of the Above investments ISA, PEP & Tessa) still form part of your estate for Inheritance Tax purposes so they are not a tax free investment, they are a tax efficient investment.
- Main Residence
No CGT is payable on the Sale of Your Primary residence.
One of the most beneficial exemptions is the sale of your main residence. Under most circumstances, the sale of your primary home is exempt from CGT, meaning you won’t pay any tax on any profit made from selling your home. This exemption is known as Private Residence Relief (PRR).
To qualify, the property must have been your primary home throughout the period of ownership, and there are other stipulations (e.g., you should not have rented out part of the property or used it for business).
There are also allowances for situations where you have lived in the property for part of the time (e.g., if you’ve lived in the property for 10 years, but moved out for a couple of years, the exemption could still apply).
This exemption allows homeowners to benefit from the rising value of property without having to pay CGT on the profit.
Cars:
No CGT is payable on the Sale of Personal Vehicles
Cars are exempt from CGT because they are considered “personal use” items. This means if you sell your personal car for a profit, you won’t be liable for any CGT on the gain. However, this does not apply to classic cars or rare cars that are seen as investments. If you buy and sell cars as a business or investment, then CGT may apply to any gains made.
Antiques:
CGT Exemption for Personal Antiques
Personal antiques, such as furniture, artwork, or collectibles, are typically exempt from CGT. This includes family heirlooms, paintings, or other collectibles that have appreciated in value. However, if you buy antiques with the intention of reselling them for profit, or if they are part of a trade or business activity, the exemption may not apply.
Key is that the item is considered a personal asset, not an investment. If you inherit or receive antiques as gifts, you can sell them without being subject to CGT.
Furniture:
Furniture is Exempt from CGT
Just like antiques, personal furniture (e.g., household furniture, ornaments, or furnishings) are typically exempt from CGT. If you sell furniture for more than you bought it for, there is generally no CGT liability, provided the furniture has been for personal use rather than as an investment.
Again, if the item has been bought or sold for business purposes, CGT might apply.
Watches:
Exemption on Watches for Personal Use. Watches, particularly luxury or collectible timepieces, can also be exempt from CGT
if they are kept for personal use. For example, if you sell a watch you have owned for years as part of your personal collection and make a profit, you do not need to pay CGT.
Please note however, if you are in the business of buying and selling luxury watches, or if they are held as part of an investment portfolio, CGT may apply to the profits.
Lottery Winnings / Gambling:
No CGT is payable on Lottery or Gambling Winnings. Lottery winnings, gambling gains, or other prizes such as sweepstakes are all exempt from CGT in the UK. Whether you win a lottery prize, casino jackpot, or a bet on a horse race, any money you receive is free from CGT.
This exemption extends to all forms of gambling, including online casinos and sports betting, meaning you can enjoy your winnings without worrying about paying tax on them.
Government Gilts:
Exemption for UK Government Bonds. Gilts are bonds issued by the UK government. They are exempt from CGT on any capital gains made when sold. These bonds typically offer a lower return compared to equities but are seen as safer investments. The tax exemption is beneficial for those seeking low-risk, steady returns over time.
The interest payments from gilts may be subject to income tax, but any gain on the sale of the gilt itself is exempt from CGT.
Premium Bonds:
CGT Exemption with limits on the amount of Investment.
Premium Bonds, issued by National Savings & Investments allow you to invest up to £50,000. Instead of earning interest, you enter a monthly prize draw to win tax-free prizes, ranging from £25 to £1 million.
- Any prize you win is completely free from tax, including CGT. So, if you win a substantial prize, you will not have to pay tax on it.
- Investment Limit: You can invest up to £50,000 in Premium Bonds as an individual
Returns (from prizes) average a yield of 4.00% per annum.
Premium Bonds provide a safe, tax-efficient investment option with the thrill of potentially winning a prize, all while avoiding CGT.
The Special Case of Cask Whisky: A CGT-Free Asset:
Since 1992, whisky casks have been classified by HMRC as a “wasting chattel,” which means they are exempt from Capital Gains Tax. This is because whisky casks are considered to have a limited life expectancy and are treated similarly to personal assets like antiques and furniture. Under this classification, investors in whisky casks enjoy a significant tax advantage compared to traditional investments.
Here’s the legislation evidencing this:
- Wasting Chattels (1992): Whisky casks fall under the category of “Wasting chattels,” and as such, they are exempt from CGT. This classification was enacted into UK law in 1992, providing investors in cask whisky a unique and tax- efficient investment opportunity.
For a deeper understanding of this legislation, refer to these resources:
- Wasting Chattels Legislation
- Google Search: Wasting Chattels 1992 Legislation
This exemption means that the gains from the sale of cask whisky, unlike traditional investments, are not subject to CGT, giving whisky investors a considerable advantage.
How CGT Affects Traditional Investments:
To better understand the difference, let’s look at a practical example:
A client, John, bought £100,000 worth of ordinary shares and £100,000 worth of cask whisky five years ago. Today, both investments have appreciated in value to £150,000.
- Shares:
- Purchase Price: £100,000
- Current Value: £150,000
- Gain: £50,000
- Less CGT Allowance (£3,000): £47,000
- CGT at 24%: £11,280
- Net Gain: £38,720 (excluding selling fees)
- Cask Whisky:
- Purchase Price: £100,000
- Current Value: £150,000
- Gain: £50,000
- CGT: None (thanks to the “wasting chattel” classification)
- Net Gain: £50,000
As you can see, while traditional investments like shares incur CGT at a rate of 24% (for higher-rate taxpayers), cask whisky investments are CGT-free, offering a clear financial advantage.
Understanding CGT Allowances and Rates:
In recent years, the annual CGT allowance has been reduced drastically. Here’s what you need to know:
- CGT Allowance: The annual tax-free allowance has dropped by a staggering 72% over the past 36 months, from £12,300 to £6,000, and now to £3,000 per tax year. This means that only the first £3,000 of capital gains you make in this tax year are tax-free.
- CGT Rates (Post-Autumn Budget 2024):
- Basic Rate Taxpayer: 10% to 18%
- Higher Rate Taxpayer: 20% to 24%
- Property: 24% (must report the sale/gain to HMRC within 60 days of the sale)
If your gains push you into the higher tax bracket (over £37,701), any additional gain will be taxed at 24%.
Why Cask Whisky Is an Attractive Investment:
- CGT-Free: Thanks to the “wasting chattel” legislation, cask whisky is exempt from Capital Gains Tax. This means you get to keep the full profit from your investment, unlike shares or property, which are taxed at a higher rate.
- Risk Profile: Cask whisky is considered a low-medium risk asset. With a steady growth curve and a proven track record of outperforming inflation, it offers a reliable investment opportunity. Whisky casks (especially single malt Scotch whisky) have a healthy historical track record of performance.
- Diversification: Investors looking to diversify their portfolios should consider allocating 5-10% of their net wealth into alternative assets like cask whisky. It provides a hedge against traditional market volatility, especially when compared to high-risk assets like stocks or bonds.
- Provenance: Scotch whisky is produced exclusively in Scotland, ensuring full provenance and authenticity. Unlike wine, which can be produced globally with varying quality standards, Scotch whisky is a controlled and regulated product with a full traceability chain, providing confidence to investors.
Wine vs. Scotch Whisky as Investments:
Wine:
- Produced globally, with 26 billion litres produced annually.
- Subject to climate changes, making it volatile and unpredictable.
- Storage and care are essential, and long-term holding periods (20-25 years) can be necessary for top wines like Lafite Rothschild.
Scotch Whisky:
- Produced in Scotland, with 440 million litres produced annually.
- Provenance is guaranteed, and there is no risk of counterfeit products.
- Whisky casks are hardy and thrive in Scotland’s climate, making them robust investments.
When it comes to a long-term, stable investment, cask whisky outperforms wine in terms of risk, storage, and returns.
Conclusion: Why Cask Whisky can be a Smart Investment:
With its unique tax advantages, low risk profile, and strong market performance, cask whisky presents a compelling opportunity for investors looking to diversify their investment portfolios.
The CGT exemption and the robust nature of Scotch whisky as an asset make it an attractive alternative to traditional investments, especially as tax rules continue to tighten.
Whether you’re a seasoned investor or new to alternative assets, whisky cask investments provide a stable, profitable, and tax-efficient opportunity.
If you’d like to learn more about whisky cask investment opportunities, contact us today to discuss how you can start building your own whisky portfolio and take advantage of the benefits this unique asset class offers.
Important information:
- The information above is correct at time of going to print January 2025
- The Vintage Whisky Group recommend that all potential investors seek independent tax advice prior to any purchase
- For overseas investors please seek local tax advice relevant to your own jurisdiction
- The Vintage Whisky Group are not advisers and the information above is both factual and in the public domain
- The Vintage Whisky group are Whisky specialists and operate with complete honesty, integrity and transparency in all aspects of our business. You are very welcome to join us at our offices in London Bridge to find out first hand what we do.
