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Classic Cars and Capital Gains Tax

I recently read about a crash between two vintage cars at Goodwood, one valued at £4m the other at £1m - an expensive collision. It got me thinking about classic cars, which have been one of those assets that have risen in value quite considerably.

Unlike normal cars, which generally depreciate from the moment you drive them off the forecourt, certain classic cars can significantly increase in value if they are a sought after make or model, or have a particular provenance. In August 2014 the world record was set for a car sold at auction: a 1962 Ferrari 250 GTO for US $38,500,000, one of only 36 ever built.

Alternative investment classes, like classic cars, have risen in value for a number of reasons including world economics with the knock-on effects of quantitative easing (the supply of money) and demand from economies like China.

According to Knight Frank classic car values have increased 469% in the past 10 years - compared to the FTSE 100, which has risen 51% over the same period. And you can't drive around in the share index.

They also have a different tax treatment to traditional investments such as stocks and shares. They don't attract capital gains tax (CGT) if you make a profit on sale as they are classed as "wasting assets", which have a predicted useful life of less than 50 years - even if they are still going after this period of time has lapsed.

On other chargeable assets, CGT is charged at 20% for higher-rate taxpayers (10% otherwise) so this represents a big difference. But there are other costs to take into account such as insurance and servicing unlike for stocks and shares.

The downside to the CGT free status is that it isn't possible to claim a capital loss for tax purposes if you lose money on the car. And so this isn't ideal for those who decide to take their £4m classic car to a race day at Goodwood because if they do crash, a tax loss can't be claimed.

It’s also worth knowing that any individual buying and selling classic cars with the main purpose of making a profit may be seen by HMRC as trading, in which case their profits will be subject to income tax at rates that are likely to be higher than capital gains tax rates.

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