One of the many attractions of fine wine investment is its immunity to Capital Gains Tax*. Like vintage cars and other so-called “wasting chattels”, the limited lifetime of fine wine means HMRC won’t charge you CGT on any profits you make by selling off a few gems from the cellar.
This could all change because of the pandemic. According to the FT, Chancellor Rishi Sunak has asked the Office of Tax Simplification “to investigate how capital gains tax is paid by individuals and smaller businesses”, with fine wine and other alternative assets potentially on the chopping block.
Apart from keeping a close eye on our Club Members’ cellars, Honest Grapes’ co-founder Nathan Hill is also a successful technology investor. As a seasoned collector himself, here are his thoughts on what the government might be planning.
The Pandemic & Flying Kites
The economic impact of the pandemic means the government is clearly seeking means to raise tax income. Having shortened the Comprehensive Spending Review to 1 year, the Treasury has an opportunity to “fly kites” of multiple ideas before publishing the Budget.
Increases in core taxes (Income Tax, VAT) and breaking the triple lock on pensions would violate manifesto pledges and be very unpopular (though may be necessary). Kites are also being flown about reduction in pension relief and increases to Capital Gains Tax, both of which would hit the top few percent of the population hardest, but which would be more popular to justify.
The proposed areas for sharpening up CGT are (i) reduced annual allowance, from the current £12,300 to £2-4,000, (ii) equalisation with Income Tax rates, (iii) changes in other specific reliefs relating to death, non-primary residence and wasting assets (within which wine is generally included). Some or all of these changes are likely to take place, and the early responses to the kite flying haven’t been substantial kick-backs to the Chancellor’s ambition.
The Effect on Fine Wine
If changes are implemented in the March 2021 budget, it makes a big difference whether these take effect on 6th April 2021, 2022 or phased over 3 years. The latter is most likely as there would be otherwise be a cliff edge and a rush to sell assets (and other tax planning such as transferring to spouses and heirs).
Any substantial increases in CGT will harm the secondary market for wine, but there are fewer ‘forced sellers’ in this market as most sensible investors in wine will have a diverse portfolio. I’d generally think of wine as a 1-2% asset allocation. As fine wine only forms a small proportion of their wealth, they are unlikely to be in a hurry, and if they need to quickly raise money there are much faster ways than liquidating a wine collection.
But the overall effect will be to lower prices and there is a pent-up reduction due for Bordeaux as prices correct to the reductions in 2019 en primeur, where release prices were 16-30% reduced from the prior vintage. This will particularly impact the most investible wines, such as those tracked by Liv-Ex.
Currency effects will be just as important, and if the pound stays weak or weakens further, gains can still be made by selling to Asian customers. If US tariffs are lowered or abolished with the change in administration, US demand will resume.
That being said, demand for new vintages could well be suppressed with reduced investor interest. Within the wine trade, these effects will impact wine investment businesses adversely and benefit businesses like Honest Grapes as there should be less scooping up of wine for investment and more allocation available for bona fide collectors.
Of the proposed changes to CGT, that affecting wine is of lower likelihood and less headline-grabbing than the others. So when you read this blog after the March 2021 budget, this will have been either great foresight, or yesterday’s speculation. I won’t be changing my approach for the time being, although if you have been looking to sell a few cases, now’s not a bad time. Wine collecting is investing in one’s future drinking pleasure, and I plan to have many years to enjoy the drawdown.
I predict that the much heralded ‘rotation to value’ will bypass wine and most alternative assets, as low interest rates push investors in search of value equities and private equity / debt. This will mean that there is still plenty of value in picking newer, under the radar estates where there is good value to be had and scarcity of supply
Wine may become temporarily out of favour as a defensive asset but the clock of the seasons, the sun, wind and rain continues to produce great wines. With ever better technical winemaking, and global warming now being understood and used to advantage in places like Burgundy's under the radar vineyards, the UK and Germany, there’s plenty of merit in picking up allocations whilst other people are looking the other way. Some recent vintages have held less of the limelight but had excellent reviews on rescoring once they’re bottled.
* Please note that the views expressed in this article should be read for information only and do not constitute tax or investment advice. Drink sensibly and do your own research into whether you want to invest in wine. Honest Grapes sees wine as an investment in your future drinking pleasure, rather than a mainstream asset class.