Wine cellar estate planning for serious collectors

Wine cellar estate planning for serious collectors

The First World problem

There are a small minority of us who take wine very seriously and from that number quite a few who have a significant wine cellar, whether under the house or in bonded storage or indeed both. The hoarding nature of the wine enthusiast means that most will have more wine than they can possibly drink in their lifetime, and often a four, or possibly five digit (in bottle count) problem. Such portfolios can end up being worth tens if not hundreds of thousands of pounds, particularly because well bought wine may well end up worth many times its original outlay. Therein lies the very First World problem, having too much valuable wine which is assessed on death for Inheritance Tax at up to 40% of its date of death open market value (sadly not original purchase price). For many the idea of an auction to raise funds for the family may well appeal, yet for others, some of the suggestions below may appeal…

Realising gains on wine and making lifetime gifts

Wine held by the private collector is generally treated as a wasting asset for capital gains tax purposes by HM Revenue & Customs, so in theory it makes it a brilliant asset class to gift in your lifetime to friends and family members who can ideally drink it in the future or otherwise sell the same and utilise the proceeds for their own benefit.

A gift of wine is of course a transfer for inheritance tax (IHT) purposes (a Potentially Exempt Transfer) the value of which would be assessable at open market value at the time of transfer and would escape IHT so long as the donor survives 7 years from date of transfer and the gifted wine is enjoyed by the recipient to the exclusion of the donor.

Retaining control of the wine as a bare trustee

If the donor still wanted to control the wine whilst having made a gift, a Declaration of Trust could be made over wine portfolio which would make a gift of the beneficial ownership whilst retaining the legal ownership under the name of the donor. This arrangement might appeal to the enthusiastic collector who does not quite want to let go and as a bare trust it is effectively owned by the donor as a nominee on behalf of the beneficial owner(s) which means that the donor is not a trustee having to file tax returns in that capacity. A practical suggestion might be to arrange for a particular holding within a bonded warehouse to be designated as held by the bare trust.

Gifting wine into a discretionary trust

Alternatively, an enthusiast might want to gift a wine portfolio into a discretionary trust. Such an arrangement could potentially be very interesting as it would be possible to devise a letter of wishes as a governing document for trustees’ decision making, which could be quite fun to draft. The potential beneficiaries could be children and grandchildren and the trustees may wish to favour those who have an active and demonstrable interest in wine and ensure that bottles are allocated of “drinking vintages” perhaps on special occasions. Otherwise, the letter of wishes could seek to maintain fairness between beneficiaries with bottles sold for uninterested beneficiaries who would prefer to receive the money. Potentially a trust could last as long as some vintage dated Port as under English Law 125 years is the permitted trust period, and it could of course be wound up far sooner.

A discretionary trust could be founded in lifetime with the donor as one of the initial trustees alongside one or two others to ensure a smooth transition upon the eventual death of the donor. Alternatively such a trust could be created on death by a will and in such document the testator would need to carefully select the initial trustees and it would be even more important to have a clear letter of wishes as a blue-print for future decision making.

Careful advice would be needed on the transfer into a discretionary trust including on valuation of the wine itself, and ideally to avoid paying any upfront Inheritance Tax on a “Chargeable Lifetime Transfer”, the value transferred should not exceed the donor’s CLT limit that may be up to £325,000. Death within 7 years of the transfer may result in IHT becoming payable on the original transfer and depending upon the age and health of the donor, it may be possible to obtain decreasing term assurance to fund any IHT liability applicable.

The actual administration of the trust could be fairly straight forward especially if no income or capital gains are realised by the trustees. Income should not be a problem as wine is not an income producing asset, and capital gains may well be fine too if wine disposals realised by trustees can still be treated as exempt. There would however be administration to do in terms of trustees’ minutes, resolutions, deed(s) of appointment, opening a bank account to pay storage and insurance and receive any sale proceeds, and any IHT100 returns required with respect of exits of capital or 10 year charge assessments.

Further discussion

Please contact Graham Harvey on 020 3745 5549 or graham@harveyassociates.co.uk for an initial without obligation discussion regarding any planning related to the above.

Disclaimer: nothing in the above article constitutes legal advice and must not be relied upon. We can only be responsible for providing specific legal advice under an agreed scope of work when engaged by clients.