Enjoy tax-free whisky gains
24th February 2023
Posted in Articles by Andrew Marr
The issue
There seems to be a lot of firms around at the moment who are singing the praises of whisky cask investment, along with predicting impressive yields. Often one of the advertising bullet points will also promise ‘tax-free gains’ and a few clients have asked me about this. My approach here is generally as follows:
1. Ascertain whether this is an investment asset (rather than stock in a trade).
2. Ascertain the values involved (chattel rules).
3. Consider wasting asset status.
Is it a capital asset?
The question of whether something is a trading activity can be fairly complicated and involves consideration of the ‘badges of trade’. This is an important question because trading profits are subject to income tax, whereas the disposal of an investment asset will be subject to capital gains tax (or no tax at all). The main badges involve frequency of transactions, profit motive, whether there is an intermediate step to improve the product and also the length of ownership (with shorter lengths of ownership suggesting a trade). Although there can be trading arguments for the disposal of a whisky cask, I think that this should generally be accepted as an investment asset. This will especially be the case with a one-off acquisition of a cask which is sold many years later.
Chattels rules
If an asset is bought and sold for less than £6,000 then it is outside the scope of capital gains tax. There are more complicated rules when the acquisition price or the sales price is more than £6,000 or when the chattels are sold as a set.
Wasting assets
Whisky casks generally evaporate at the rate of 2% per annum which is known as ‘the angel’s share’. This means that a whisky cask will generally “not have a predictable life exceeding 50 years” and therefore it meets the definition of a wasting asset. This in turn means that its disposal will be free from capital gains tax and also that it cannot give rise to capital losses.
Example
In 2012 Nigel bought a 10 year-old cask of Jura whisky for £8,000. He has recently sold this as a 21 year old cask for £18,000. On the basis that this was an isolated investment, we have concluded that no capital gain arises, and Nigel can enjoy his gain tax-free. The flip side of this is that if he had made a loss, then it would not have been relievable for tax purposes.
Forbes Dawson view
At least from a tax perspective, cask whisky investing does have its merits (although it is an unregulated investment activity and so take care!). It is important to appreciate that bottles (as opposed to casks) of whisky are not usually wasting assets. Recently, a rare 1925 bottle of Macallan sold for over £1m. Furthermore, if you keep hold of the cask and then bottle the whisky for sale, then the bottles will not be wasting assets and it would be likely that you would have crossed the line into trading territory. On sale, you would then have to decide whether you have always been trading (in which case all profit would be subject to income tax) or whether you only started your trading venture at the point of bottling, in which case profit over and above the value of the cask at bottling stage would be subject to income tax. Bottling also comes with fairly heavy excise duty implications and so you should seek proper advice here…
