Protect your Wealth

By Michael Fogg

Aside from bricks and mortar ‘real estate’, a common asset owned by many people is a vehicle. Be it a daily run-around car, or one or more classic or other collectable vehicles.

These vehicles are part of an individual’s personal possessions, legally known as chattels. I have been asked on a couple of occasions over the past month how these are treated for tax purposes. Obviously, it goes without saying that anything I say here is general observation and should not be treated as any form of fi nancial advice. Please do not rely on it, but instead seek appropriate legal or fi nancial advice from a qualifi ed professional based on your personal circumstances.

Forms of Tax

There are, broadly, three forms of tax that I shall focus on in this article. These are Income Tax, Capital Gains Tax, and Inheritance Tax. Each of these three forms of taxation has different rules governing them, and on whether they apply to each vehicle.

Assumptions

For each of the three taxes I deal with below, I shall assume that the vehicle is legally owned by one person, rather than by a Registered Company, a Trust, or a Charity. Should the vehicle be owned by any of these, then the rules relating to taxation will be different (and potentially more benefi cial – although this will depend upon the situation). I’d be happy to discuss with anyone who has questions on this.

Income Tax

A vehicle is an asset, and as such could be used to generate income. Most commonly, this would be through rental of the vehicle (although make sure that your insurance allows for this) or else through using the vehicle as a private hire vehicle (for example, a taxi, a limousine, or for specialist work such as wedding hire). Should this be the case, any income generated by the vehicle is classed as income and should be accounted for as part of your annual self-assessment tax return. Be aware that there are some costs which can – in some circumstances – be offset against the income to leave a smaller amount against which income tax will be charged. It’s worth ensuring that you consult with an appropriate professional such as an accountant to make sure that all relevant expenses have been considered.

Likewise, it is worth exploring who the most sensible person is to pay income tax on the income generated by the vehicle. For example, if you are married and one of you is a higher-rate income taxpayer and the other of you is a basic rate income taxpayer, it may be sensible to consider using your spousal gifting allowance to legally transfer assets from the ownership of the top-rate taxpayer to the basic rate taxpayer to minimise the amount of income tax that needs to be paid. Again, should you think this approach might be benefi cial, you may benefi t from seeking independent advice to ensure that it is done correctly, and legally.

Capital Gains Tax

The general rule here is that when an asset has appreciated in value between being acquired and disposed of, that there is a chargeable gain which may need to be taxed. Each person has an annual Capital Gains Tax (“CGT”) allowance which they can use, but any gains above this allowance are taxed at a fairly high rate (currently 28%). However, there are two exemptions which can be used to legally avoid paying CGT on the sale of a motor vehicle by classing it as a ‘wasting asset’. This means that it is an asset that is estimated to have less than 50 years’ worth of use remaining. It’s worth noting that, even when the vehicle remains in existence for over 50 years, the same exemption applies. These exemptions are: • where the vehicle is classed as a passenger car

(basically, anything which can carry a passenger and is not a taxi or motorcycle/sidecar). • where a vehicle is not classed as a passenger car, it can be classed as ‘machinery’ for CGT purposes. A word to the wise, however... where the car has been used for the purposes of a business and tax allowances have, or could have been claimed on it, the exemptions would not apply. Tax would, therefore, be on due upon disposal of the asset. Again, therefore, I recommend independent advice should you be considering using a vehicle to generate income (please see my section on income tax above).

Inheritance Tax

The rules around Inheritance Tax (“IHT”) are a little more complex. You can leave an unlimited amount to your surviving spouse or legal civil partner without IHT being due. Should you leave your Estate (being what you legally own on the date of your death) to anyone else then some of it may trigger a need to pay IHT. Each of us has a personal IHT allowance (a ‘nil rate band’) which is currently £325,000 per person. The amount that can be left free of IHT can, in some cases rise to as much as £1m which can be left to certain people free of any IHT. Likewise, this amount can be reduced if you have made certain gifts in the seven years before your death, or if you have transferred assets into Trust (the rules around this are quite complex, as some Trusts are only taken into account for the seven years before death, and others are always taken into account). The value of each vehicle you own on the date of your passing will form a part of your Estate for tax purposes. For a vehicle that is being transferred to a new owner (a beneficiary of the Estate) it is usually sufficient for a general appraisal of market value to be obtained using a resource like Parkers Car Valuation Guide. However, for a more specialist vehicle (in particular, for vehicles over 50 years of age or where they are particularly high value) it is advisable to make use of a specialist professional valuer with expertise in vehicle valuations. Should you have a need for this, again, please feel free to make contact and I will do my best to assist.

Need Help?

If you would like any help or advice on anything mentioned above, we would be happy to answer any questions by phone or email. Please get in touch on 029 2021 1693 or by emailing TrustingWillpower@outlook.com.