Do I need to pay tax on my car collection?

The good news is that, as assets go, cars can be particularly tax efficient. The bad news is, they aren't always quite as tax efficient as those with wealth invested in cars (and some professionals!) believe them to be.

In simple terms, the two key ‘personal’ taxes that are at play when looking at assets such as cars are Capital Gains Tax and Inheritance Tax. Capital Gains Tax is broadly charged at 20%, Inheritance Tax at 40% (although more on that below). Capital Gains Tax will bite when someone disposes of an asset, either by gift or sale, that has increased in value. Inheritance Tax will bite when the owner of an asset dies.

First the good news – thanks to a specific exemption in legislation, passenger vehicles are exempt from Capital Gains Tax. Therefore, even if a car has increased significantly in value, a lifetime gift or sale of the car won't create a charge to Capital Gains Tax on the increase in value. So gifting cars, particularly those that have increased in value, can be an efficient way to reduce the value of one’s estate during their lifetime - thereby reducing the future charge to Inheritance Tax.

But, there are some caveats to this exemption. Firstly, single seat sports cars are not exempt – by nature these are not ‘passenger vehicles’. Cars used for business purposes are also not exempt. Finally, any personalised number plates are not exempt, something often overlooked. If a number plate is sold with the car, tax will be chargeable on any increase in the value of the plate since acquisition, and needs to be reported to HMRC accordingly.

So far so good! But, now the bad news. Cars aren't exempt from Inheritance Tax. Personal use cars are chargeable to Inheritance Tax like any other asset, and will be taxed accordingly. Therefore, if a person dies owning a car, their estate will be taxed on the market value of that car at 40%, with the tax due 6 months after the date of death.

The Capital Gains Tax exemption undoubtedly makes lifetime planning with cars much easier than with other assets. Therefore, those with valuable cars or collections of cars who are looking to reduce their estates from an Inheritance Tax perspective should consider lifetime gifting or sale of the vehicles. It should be noted, however, that gifting doesn't avoid Inheritance Tax entirely – a person must survive for 7 years after a gift, and there are strict rules about not continuing to benefit from the assets after giving it away (you shouldn't continue to drive a car you have given away regularly, or leave it stored in your garage, for example). Legal and tax advice should always be sought before undertaking any estate planning.

Finally, a note on the future of Capital Gains Tax and Inheritance Tax. Unfortunately, I’m not the proud owner of a crystal ball, but one thing we do know is that the Labour party have committed to not raising certain taxes, but Capital Gains Tax and Inheritance Tax are not among those taxes. We’re, therefore, likely, in due course, to see changes to these taxes. While we can’t predict what those changes will be, they are unlikely to come until autumn. Those considering planning may, therefore, take comfort in making planning decisions sooner rather than later in the current known tax environment.