Classic Cars and Tax Exemption

Classic cars and tax exemption

Classic cars are proving once again to be one of the best investments. Despite the global recession, classic car value has continued to rise. The Knight Frank 2016 Wealth Report states, "Classic cars (+17%) continue to top our league, with furniture again bringing up the rear (-6%)"

Aside from the obvious pleasures of owning a classic car – well restored vehicles are stunning to look at, historically significant and most importantly fun to own and drive! There are also tax benefits to owning a classic car.

The world of tax is extremely complicated and confusing for the majority. There are however, numerous loopholes and classic cars are among tax free investments.

Capital Gains Tax (CGT) & Classic Cars

CGT refers to the taxation on the profit of a previously acquired asset that has increased in value since the time of acquirement, to its sale. Certain types of assets are CGT free, these are described as wasting assets and have a predicted life span of up to 50 years. Plant or machinery is considered a wasting asset, as they depreciate in value over their life span. HMRC considers classic or vintage cars as wasting assets – privately owned classic cars along with pleasure boats and such like, all qualify for a CGT tax break. However, if used in a business where capital allowances were or could have been changed, the taxes will change. Likewise if you are seen to be frequently buying and selling classic cars, it is more than likely that HMRC will consider this car dealership and CGT will become applicable.

Classic Car Road Tax

Cars built before 1976 are eligible for the historic vehicle class, meaning that their owners are exempt from paying road tax. Not only that, but your car may qualify for an age-related registration number, provided it meets the required criteria.

Inheritance Tax & Classic Cars

Unfortunately classic cars like most assets are not exempt from inheritance tax, they will be classed as part of the estate. The inheritance tax threshold is currently £325,000. If the overall value of the estate (including any classic cars) exceeds this figure, the difference will be liable for inheritance tax at a rate of 40% for beneficiaries.

There are some possible ways to avoid paying inheritance tax on your classic car but regrettably these are not feasible options for everybody. In some cases classic cars can qualify as ‘heritage property’, making them exempt from inheritance tax. In order to qualify for this exemption, certain conditions must complied with; such as, allowing the car to be displayed in a public place for set periods of time, keeping the car clean and in a good working condition.

Another way around this problem is for an owner to donate the car as a gift to a beneficiary before their death. This does however, pose certain restrictions on the owner’s rights to use of the car, as it may end up being classed as gift with a reservation and subject to inheritance tax. A gift with reservation is a gift given with some sort of expectation or condition in return. A classic example is when a donor makes a gift of a property but retains some of the benefits of the property for himself – for example, the property is passed on to a beneficiary, but the donor continues to reside in the property for a further 7 years before his death.

In the case of the classic car, the donor would more than likely have to forfeit all their rights to the enjoyment of the car in order to avoid it being categorised as a gift with reservation. As to whether or not they could transfer the legal ownership to a beneficiary and simply become a named driver becomes a more hazy area as where the car is stored and who holds the insurance policy may all come into question with HMRC. However, Classic cars still remain one of the best investments around and come with some excellent benefits.