Our clients’ classic and super car obsessions come in all shapes and sizes. For some it will be long-term loyalty to a single cherished vehicle, whereas for others, a collection has been built up over a lifetime. While we can’t advise on motor vehicles as investment assets, there’s no doubt certain marques have performed at least as well as conventional investments. So, as a collection grows, it can become a significant part of clients’ assets and many become concerned about the impact of tax on their collection.
In general, capital gains tax is charged at 20% when you sell an asset at a profit. However, assets which are considered ‘wasting assets’ with a useful life of 50 years or less fall outside the capital gains tax regime. Clearly there are many cars still on the road after 50 years, but broadly speaking, cars are mechanical structures which deteriorate over time and are not expected to last that long. Consequently, cars are considered wasting assets and are exempt from capital gains tax. That might sound good, but it also means that losses from car sales are not allowable. As most cars are sold at a loss, you can see why the capital gains tax exemption makes sense from HMRC’s viewpoint.
Sadly, there is no equivalent exemption from inheritance tax. If you are ‘domiciled’ in the UK, meaning that the UK is your permanent home, HMRC will want 40% of your worldwide estate over £325,000 on your death. Car collections form part of that worldwide estate and, in the absence of any planning, will need to be valued for probate purposes and included in the IHT calculation that is submitted to HMRC.
It is, of course, possible to make a gift of your cars during your lifetime and, if you survive for seven years from the date of the gift, then the gift is exempt from inheritance tax. The title to a car can be changed easily using the V5 form and so, in theory, this is an easy piece of estate planning. What makes it more complicated are the rules which prevent you from making gifts ‘with strings attached’. So, just as for inheritance tax purposes you cannot transfer your house to your children and continue to live in it, you cannot transfer your cars to your beneficiaries and continue to use and keep them as you did before. If you do, it’s called a ‘gift with reservation’ and it doesn’t work for inheritance tax.
The answer is that you should pay your beneficiaries a market rent for use of the car after making the gift. The rent will be taxable income for them, but they may find that the income tax liability is a good deal cheaper than paying the inheritance tax, particularly if your car has a pampered life and doesn’t go out very often. The rental values for classic cars are unlikely to bear much resemblance to those you’d find at a normal car hire company, so you might need to take some advice. Simply accepting an occasional lift in the gifted car will not cause the gift to be ineffective.
On the other hand, the matter of where to store the cars can be problematic. If you have special garage accommodation for your collection, moving the cars to your child’s house may not be practical. Bear in mind that HMRC may want sight of your insurance policy and the insurers will need accurate information on the whereabouts of the cars. So, if you keep the vehicles in their existing garage, you can expect HMRC to apply the gift with reservation provisions to stop your gift working for IHT purposes.
If, having made a gift of a car or two, you don’t survive for seven years after the gift, then additional tax may be due on your death. If the car’s value is less than the £325,000 nil rate band and you have not made other gifts in the seven years leading up to your death, then no further tax is due on the gift. Note, however, that the value of the car at the date of the gift is deducted from the £325,000 which is available for the rest of your estate. If, on the other hand, the value of the car is more than £325,000, then additional tax becomes due. So, for example, if you gift a car worth £500,000 and die after 5 years, then inheritance tax is due on the excess over £325,000, i.e. £175,000. The tax at 40% would be £70,000, but a tapering of the tax applies after three years, so for someone dying between 5 and 6 years after the gift, there is a 60% reduction. So rather than paying £70,000, the beneficiary would pay £28,000, an effective rate of 16% on the £175,000 which was subject to inheritance tax.
Another point to remember is that the growth in value of any car which is successfully gifted is outside your estate. So, even if you die within seven years of the gift, the value taxed is the original value at the point of gift, not the market value at the date of your death.
Finally, there is an exemption from both IHT and CGT for assets which are of national, scientific, historic or architectural interest. Usually this applies to buildings and gardens but could in theory apply to collections of historic vehicles. Inevitably the exemption comes with conditions, so the asset must remain in the UK and must be available for public access. When the car is transferred, following a death for example, the exemption will be withdrawn unless the new owner agrees to the conditions.
All in all, there is much to be said for thinking about estate planning for your car collection, but the inheritance tax rules are complicated, so drive carefully!
Clare Munro is our Senior Tax Advisor. Within her day-to-day role, she provides tax advice to high-net-worth clients in relation to their banking and wealth management needs. With a particular interest in inheritance tax and capital gains tax planning, Clare helps clients to structure their wealth tax efficiently to preserve it through family generations.
Important information
Tax laws are subject to change and taxation will vary depending on individual circumstances.
*Featured on the Walton-on-Thames Aston Martin blog (February 2024): The winding road to tax planning for car collections.