Wine portfolios are becoming a popular way of investing money and are often marketed as 'tax free lump sums' that mature at a specific time in the future.

They are only tax free, though, if they are handled correctly.

Generally, anyone selling wine as a trade will be subject to income tax in the usual way, whereas profits made on the non-trading sale of wine are subject to capital gains tax (CGT) at the flat rate of 18%.

Wine investors will benefit from the CGT annual tax free allowance – £10,100 in 2010/2011.

There may, however, be no CGT at all due to the availability of two exemptions: the wasting assets exemption, and the chattels exemption.

Wasting assets exemption

To claim this, an investor would need to show that the wine has a predictable life at the date of acquisition not exceeding 50 years. 'Life' means usual life, having regard to the purpose for which it was acquired – drinking!

Trevor George, head of Wills, Family & Wealth at Access Legal from Shoosmiths said: "Wine markets and trends in taste can change, and it can be difficult to know at the date of purchasing wine what its expected useful life will be.

"It's a good idea for the investor to obtain expert evidence from a wine broker about the expected useful life and to declare the disposal on his tax return."
 
HM Revenue & Customs (HMRC) provides guidance on this issue, stating: "We would normally contend that wine is not a wasting asset if it appears to be a fine wine which not unusually is kept...for substantial periods, sometimes well in excess of 50 years." 

HMRC accepts that table wine is a wasting asset, as it will become undrinkable within a relatively short period, whereas port and other fortified wines have much longer lives and are not regarded as wasting assets.

Chattels exemption

If the wasting assets exemption is not applicable, it may still be possible to use the chattels exemption.

Where wine investments are sold for less than £6,000, a chargeable gain will not arise, unless a wine collection is split and sold to the same purchaser in a series of connected sales.

Karen Shakespeare, associate in the Wills, Family & Wealth team, said: "As long as the investments are handled correctly to take advantage of one of the CGT exemptions, wine portfolios can be a tax efficient means of investing money.

"They also have the advantage that the assets are easily liquidated – drink them!"

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