Friday, 24 July 2009

EIS - Tax Efficient Opportunities in Fine Wine

Traditionally there have been three ways you can invest in wine. There is now a 4th which ties in the tax benefits of an EIS scheme: The 1855 Club.

The first three ways of investing in wine all have advantages but the main disadvantage is one of cost.

1. Use a wine merchant and buy it yourself. You are then responsible for selection and storage

2. Buy through a Wine Merchant with a Private Cellar Plan. They will advise with choices and budgets as well as storage.

With the first two options you have some control over the wines you are buying but you will be buying at retail prices - which come with a margin anywhere between 12 – 35% depending on the wine. The most popular for investment purposes will attract the higher margin for the merchant. Plus you have storage costs, which in the scheme of things is not very expensive but when you wish to sell your investment the wine merchant will charge a further 10% commission on the selling price. Therefore you may have to gain somewhere around 50% of the wines original value before you are into a profit or gain situation. Although HRMC (Inland Revenue) look at wine as a wasting asset (life expectancy of less than 50 years) and therefore free from Capital Gains Tax (GCT) they have the right to demand proof that the wine was bought for drinking not purely as an investment.

3. Invest in a Wine Fund.

Wine funds can be costly for the investor with high performance fees along side management fees and in some cases storage costs. Management and performance fees are based as a percentage of the valuation of the fund as a whole and are based on unrealised prices. Although the valuations are through independent professionals these charges can be rather high and restrictive, which can eat heavily into your gains such as a 20% performance fee over an agreed hurdle rate with some on an annualised basis. Other costs can include initial set up costs, storage costs as well as the annual management fee. They boast of no CGT on the gain but the same caveat may apply as with the personal cellar. As a fund will be managed you will have very little input into its running or control.
With the 50% tax band looming for higher income earners Tax planning is an important consideration when looking at potential investments.

Based on this assumption the 4th alternative route into Fine Wine investment offers qualifying UK tax payers a very advantageous and tax efficient opportunity which can benefit the investor from exemptions of Capital Gains, Income Tax and Inheritance Tax. Investors can also qualify for GCT refunds if they invest in this scheme as it has been created under Enterprise Investment Scheme (EIS) which is designed to support enterprise.

EIS provides income tax relief of 20% if you hold the investment for at least 3 years. In addition if you have previously crystallised capital gains attracting a tax rate of 40%, the gain can be deferred if you invest into an EIS company within 3 years of creating the gain. You still have to pay capital gains tax on the deferred gain but only when you sell the shares in an EIS company. However under current rules this is at a reduced rate of 18% resulting in a further saving of 22% on past gains.

Shares held in EIS companies for the relevant period are also exempt from capital gains tax and inheritance tax. The recent budget has further enhanced their benefits as investors now have the option to treat an investment made in this tax year as eligible for relief against their tax bill for 2008/09, so the benefits are received earlier.

EIS companies, to some, are seen as a risk especially when they operate in more spurious activities. However, if they are strongly asset backed they tend to represent a safer investment. The minimum entry level for an EIS trading company is £500 with a maximum level of £500000 for anyone individual.

The 1855 Club, is a company trading in Fine Wine which has been created under the rules of EIS having received advanced clearance from HRMC and has been designed for the benefit of the shareholders. It combines all the benefits of the traditional routes plus it offers greater tax efficiencies along with involvement for the investor through Châteaux visits, tastings with wine makers and much more. With a minimum entrance level of £25000 it currently is the only EIS Company to take advantage of the EIS rules trading in fine wine in the market place and offers an interesting opportunity as an alternative investment. Shareholders will find this a participative and a life style investment giving them the opportunity to indulge in a hobby where they will gain wider appreciation of fine wine at the same time receiving gains on their investments - targeting 8% return per annum.

Professional advisors would consider about 5% of a balanced investment portfolio to be placed into alternative investments. As a product this could fit well into any portfolio. If you would like to know more about this topic please contact me , or ask your IFA or agent to do so. Call 01452 840116 or by email at nick.stephens@interestinwine.co.uk

1 comment:

Hampers said...

Thanks for sharing the tax efficient opportunities in Fine wine. Enjoyed going through it. keep it up the good work.