Tax changes coming?

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Posted: 201103

Yesterday the Chancellor set out details of the UK Government's Spending Review but it was not a Budget statement, so the likely tax changes will follow, presumably in the next Budget statement in Spring 2021. With the unprecedented level of spending by the UK Government to deal with the extraordinary social, health service and economic difficulties during the Covid pandemic, there has been massive borrowing to pay for it. But it's inevitable the process of repairing the UK finances will begin with tax rises likely from 2021. But faced with the size of the financial difficulties, the Chancellor will review not only higher tax rates but also it is likely he will review a wider scope of taxes to generate the levels of tax revenue needed. Just what that wider scope might include has not been announced but on the Radio 4 Today programme this morning Rishi Sunak firmly declined to be drawn at this stage.

Here we consider some of the tax options that could affect classic car owners and some of the key issues.
Over the last week several V8 members have been in contact discussing what tax options the Chancellor might consider that could hit classic car owners in 2021 and what key issues might arise before any option could become part of a package of tax measures in a future Budget statement.

Capital Gains Tax on the sale of classic cars
Talk of a review or an overhaul of Capital Gains Tax (CGT) followed reports that Rishi Sunak had already asked the Office of Tax Simplification (OTS) to look at CGT. In their report the OTS identified older cars as "chattels" (a tangible moveable asset), a term that covers valuable assets, like paintings and other works of art, watches and jewellery that are often chosen not only for their attraction but also as investments. Whilst chattels are usually expected to depreciate over time and are exempt from CGT - typically a car is seen as a depreciating asset for tax purposes as they are assumed to have a limited useful life, some "wasting assets". Cars have always been specifically exempt from CGT because the vast majority of car owners make a regular loss on buying, running and disposing of their cars and the Treasury would not want these losses available to offset gains on other investments. No distinction is currently made between modern and classic cars.

Classic car values over recent years
Clearly values of many classic cars have risen over the last 10 years or so, not only exceptional increases with the "cherries" bought by investors (like Astons, Ferraris and Jaguars), but also significant increases for mainstream classics like MGV8s (around a 115% uplift in that period) and even with hot hatchbacks. But assuming the Treasury are so desperate to find new ways of raising taxes, devising a system for gathering CGT from classic car sales would not be straightforward.

What could be the issues raising difficulties for CGT on classic cars?
The main issues could be what classic cars might be taxed, how do you calculate the tax and would the CGT rate be increased?

> What classic cars to tax?
To make the tax raid worthwhile the cars sales generating the larger capital gains would be the target. The target cars will tend to be the "cherries" where large increases in value have been see over the last 10 years rather than a broad brush system sweeping up even modestly prices classic cars. Many of the "cherries" have been purchased over the last 10 years by investors rather than genuine enthusiasts. With generally low interest rates over that period many investors had looked for other ways of investing their funds to try and get a better return. Their activities were seen in the classic car sector and have contributed to the significant increase in values. Those buyers were referred to as "alternative investors".

> How would you calculate the capital gain for CGT?
Whilst the purchase price might be clear (at auction or by a private or trade sale), other factors can contribute to the market value of a classic car. The condition is a major factor and the three aspects which determine the current value, other than good maintenance and careful use, are any improvements through any major maintenance (like a rebuilt engine), refurbishment or a major restoration. They each can involve a considerable financial outlay which could be seen as an entirely reasonable addition to the purchase cost with the result of reducing any "capital gain" for tax purposes from increases in market values and hence sale price should the car be sold by the owner. The difficulties of drafting appropriate legislation appear considerable, particularly given the scope for avoidance and manipulation, and given one objective of the review was simplification, probably classic cars are one of the less likely targets for raising revenue.

> Would the CGT rate increase?
This seems likely as an easier tax change.

Wealth tax
There are concerns that a wealth tax, possibly a one off wealth tax, might be an option adopted by the Chancellor.