TT42: Capital Gains Tax Exemption

September 22, 2003

Sell at a profit and pay no tax!
A little known fact is that some items are, by definition, not subject to Capital Gains Tax (“CGT”) should you sell them at a profit. These items are called Wasting Assets and are defined as assets having a useful life of less than 50 years. Examples include motor cars, other plant and machinery, livestock, fine wines, guns etc.
Beware the taxman’s traps!
Sadly, there are various rules to ensure that no taxpayer has an unfair advantage over the taxman!

  1. Motor cars – passenger vehicles are covered by this exemption. However, non-passenger vehicles such as racing cars, may not be exempt if used in a trade.Whilst the selling of motor cars is outside the scope of CGT, the Inland Revenue might try to tax sales under income tax. (This method of attack by the Inland Revenue might be possible for all CGT exempt Wasting Assets, see below for details of this pitfall.)
  2. Plant and machinery – in order to use this significant exemption from tax, the item of plant or machinery under consideration cannot have been used in a trade and qualified for capital allowances. (So the scope of this advantage can be quite limited – but see below)
  3. Livestock – shares in livestock such as racehorses are exempt unless such assets are owned as part of a trade.
  4. Fine wines – these will qualify, but beware fortified wines such as Port, which the Inland Revenue judge as having a shelf life in excess of 50 years.

Surprising examples – good news and bad news
Antique clocks are good news. Despite them having extremely long lives, by definition they are plant and machinery and therefore deemed to be Wasting Assets and so exempt from CGT. A clock by the famous English clockmaker Tompion recently sold for more than £340,000 at auction, but was exempt from CGT. Guns also qualify under this category.

Being classified as a trader is bad news. In a celebrated case, before the existence of CGT, the Inland Revenue tried to tax under income tax rules the investment profit made on a bar of silver by Norman Wisdom (really!). Despite the fact that CGT had not yet been introduced the Inland Revenue won the case because the defendant was ruled to be a trader even though only one item had been bought and resold – hardly a “trader” under most people’s understanding of the phrase. The key point in the case was the Inland Revenue’s successful argument that the defendant had bought the item with the sole intention of making a profit on sale.

Barnes Roffe Topical Tips

  • Should you have Wasting Assets, or intend to invest in them, you should ensure that you can demonstrate the investment is for your own enjoyment of the asset and not only for its potential increase in value.
  • Above all, make sure that you do not take on the characteristics of a trader by buying and selling too often to realise profit or you might end up paying tax regardless.

Topical Tips is designed to be a simple and useful source of ideas and information for clients and contacts of Barnes Roffe LLP. If you are unsure about the implications of any idea contained therein please contact your Barnes Roffe LLP partner. Barnes Roffe LLP cannot take responsibility if the ideas are implemented without its involvement.

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