Complexity To Stamp Duty Advice
What Is Stamp Duty Advice? Stamp duty advice is usually advice about stamp duty land tax or “SDLT” or in Scotland, land and buildings transaction...
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I thought I’d offer some thoughts on capital gains tax on cars and the UK tax treatment of selling high-end difficult to get hold-of-new cars such as the more exotic Porsche 911s, Ferraris and also more recent classic cars, which have acquired iconic status among enthusiasts.
A good example is the cars listed for an auction in Paris that I attended recently here, some of which went for prices well over their sale estimates. This magnificent Porsche 911Turbo 3.6, for example, went for well over twice its sale estimate of Euro 225,000.
The selling of certain new cars for “overs” has been a thing since the Pandemic when supplies of rare in-demand cars were even more restricted than usual, leading to the lucky few buyers who are on good terms with a dealer who has an allocation of a few of these scarce cars being able to buy on sale or return terms. Having bought the car, some of these buyers immediately put the car on sale in collaboration with the dealer at what in some cases have been huge mark-ups that simply reflect buyer demand and restricted supply. Pure capitalism at work.
Examples of these types of cars which were going for huge overs are the Porsche 911 GT3s and 4s, Turbos, 992 Sport Classics, and the rarer Ferraris including the Purosangues.
To see the current state of the market for these types of cars, all you need to do is go on the Auto Trader website, and I recommend downloading the AT Price Tracker extension for Chrome, which is free and shows you the price history of every particular car advertised. Right now, in the UK market, due to high-interest rates, the asking prices of many of these high-end cars are being reduced, especially some of the Porsches although certain models, such as the 992 Sport Classic remain in very limited supply and are going for huge overs if you can find one that is for sale and hasn’t been exported to other RHD countries or put in an air-conditioned garage in places like Switzerland by wealthy ex-pats.
There is some confusion and misunderstandings among buyers, sellers and investors in new and older iconic cars about the correct UK tax treatment for selling these types of cars. Many believe that they can routinely flip cars at a profit, tax-free.
This may be true in some cases, but in other cases, tax is paid on car flips, and if you are assuming that the profit on your high-end car is tax-free and haven’t included it in your tax return, you could be in for an unpleasant surprise in the 12 months following the submission of your tax return if you receive a brown envelope from His Majesty’s Revenue and Customs opening a check as to why the cars you’re been flipping have not been reported to them. HMRC have some pretty sophisticated information-gathering resources now, and they are likely to be aware of sales of high-end cars from dealers and at auctions alike, the list and actual selling prices and the identities of the sellers and buyers.
First, a reminder that when an asset is sold at a gain over cost price, capital gains tax is normally payable if the gain exceeds the person’s annual exemption, which from April 2024 is £3000 and if you are a higher or additional rate income taxpayer, i.e., earning over £50,270, then the rate of CGT is 24%
However, in the case of what the legislation calls wasting chattels i.e., tangible movable property that is treated as not lasting for more than 50 years, the gains on such assets are exempt and any losses are not allowable against other taxable gains. Mechanical items such as watches are regarded by HMRC as having a useful life of 50 years or less and, as such, are wasting assets, which means that any gains on watches and other wasting assets are exempt from CGT. Passenger cars are specifically regarded as not being chargeable assets and so are outside the scope of CGT.
This apparent generosity by HMRC towards owners of expensive cars and watches simply reflects the fact that most cars and watches are eventually sold at a loss over cost price, and so regarding them as outside the scope of tax avoids the tax system being awash with allowable tax losses.
However, the exemption for gains on such assets does create an opportunity for the savvy investor and collector to acquire cars that will appreciate in the knowledge that gains on selling them will not attract CGT. Hence a collection of classic or high-end rare modern cars or watches that the owner has chosen wisely and are gaining value will be tax-exempt compared with say a collection of paintings, jewellery, antique furniture or whisky or a wine collection where the type of whisky or wine would be capable of being kept more than 50 years and remain drinkable, which are treated as non-wasting assets and which as such, will be taxable on any future gains made on a sale or other disposal where the sales proceeds exceed £6,000. This difference in the tax treatment represents a huge advantage for the owners of cars and watches and has no doubt helped to drive the enormous increase in selling prices of such items in recent years.
There are two main situations where, despite the CGT exemption for cars, you should, however, pay tax on gains made on the sale of cars.
First, you cannot rely on the CGT exemption where the car has been used in a business and capital allowances have or could have been claimed on it, and so the disposal of the car may then give rise to a tax charge as if it wasn’t a wasting asset.
Second, if your buying and selling of cars amount to a trade in itself so that HMRC regard you as dealing in cars, then the cars will be regarded as trading stock and your profit after allowable expenses must be reported to them, and income tax paid.
This second category is where regular flippers of high-end rare motor cars can come unstuck and end up with an HMRC investigation if they do not recognise the reality that they have an income-taxable trade of dealing in cars and report and pay the appropriate tax. The fact that the flipper has a cosy relationship with a car dealer or auctioneer who regularly feeds them highly difficult-to-obtain models of car out of the dealer’s limited allocation of that model or pre-auction and then places the cars on sale or return with that dealer or auctioneer who shares in the uplift in selling price obtained does not mean that the flipper is merely an investor or car collector making a capital gain on a wasting assets that is exempt for CGT. In this situation, HMRC will regard them as traders liable to income tax (and VAT on imported cars).
The definition of trade in section 989 Income Tax Act 2007 is pretty broad and makes it clear that trade includes the phrase ‘adventure like trade’ so that activities that, in ordinary language, may not be a full-blown trade can nevertheless be within the charge to tax on trade profits.
The courts have said that the phrase ‘adventure like trade’ is wide enough to bring within the income tax charge on trade profits:
“‘The purchaser of a large quantity of commodities like whisky, greatly over what could be used by himself, his family and friends, a commodity which yields no pride of possession, which cannot be turned to account except by a process of realisation, I can scarcely consider being other than an adventurer in a transaction like a trade… Most important of all, the actual dealings of the respondent with the whisky were exactly of the kind that takes place in ordinary trade.’
and
However, not every isolated transaction or speculative adventure that yields a profit will be within the charge, and there are examples of the courts deciding that an isolated, one-off transaction that yields a profit is nevertheless not taxable, although such cases are rare.
Nevertheless, the likelihood is that the regular flipping of cars will be treated as a trade and for this purpose, I think that two or more flips a year will be sufficient to establish a taxable trade, especially where the gains are substantial. Then there is also the possibility that an isolated flip of a valuable hard to obtained car, especially at a substantial buying and selling price will be regarded as an adventure-like trade, as will a speculative flip that yields a substantial profit and relies on short-term financing that is repaid from the proceeds of the flip such as acquiring a Ferrari Purosangue from a dealer on car finance for around the list price with options of say £400,000 with the understanding that this will be repaid within the year from the anticipated sale of the car at a profit at say £1m, which from anecdotal evidence is a realistic possibility in the months after a car is launched.
For those eager to delve deeper into the intricacies of automotive asset valuation and taxation, I recommend watching our recently released Capital Gains Tax and Inheritance Tax On Classic And Exquisite Cars, a comprehensive discussion featuring insights from renowned car trader Tom Hartley Jnr. This video provides an additional layer of expertise to the complexities we’ve explored in this article, offering valuable perspectives on the tax implications surrounding high-end and classic car investments.
These examples show that it is not safe to simply assume that because it’s a car, then the sale of that car at a profit will be exempt from tax. You need to be careful and take a realistic view of all the surrounding facts if you decide not to report the sale to HMRC and not to pay tax. You don’t want to receive that dreaded brown envelope from HMRC informing you that you are under tax investigation. For further information, please watch my video on tax and flipping cars here.
Feel free to contact me for further advice about this if you are concerned about getting your tax right or if you are under investigation using the link below.
Thanks for reading this enjoy your car or cars!
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