BIK: Bangers and Cash?

We recently had an interesting query from a client of one of our accountancy contacts:

Is there anything to stop me selling my classic car to my limited company?

First of all, why would the client want to do that in the first place?

In this particular case the car in question was a high-end classic car with a value of £1m. It had cost the client £100,000 many years earlier.

The main motivations for the client were:

• The capital gain of £900,000 on the disposal at market value to the company would not be taxable. There is an exemption for any gains on disposals of “passenger vehicles” under Section 263 Taxation of Chargeable Gains Act 1992; and
• This would mean that the client could withdraw surplus cash of £1m from the company tax-free. Alternatively, create a credit director’s loan account balance of £1m to drawdown in the future.

Sounds too good to be true?…

HMRC Bear Trap

The main stumbling block here are the benefit-in-kind (BIK) rules relating to company cars.

A BIK arises where a car or van is made available to an employee or a member of the employee’s family (s.114 ITEPA 2003).

On the issue of whether a car is “made available”, HMRC adopt a hard line. To illustrate this point, HMRC do not accept that a car is not available in the following scenarios:

• Where the director has been banned from driving does not mean that the car is not available for private use. Even though this means using the car would be illegal.

• Where the car has an off-road ( SORN) declaration so that driving it would also be illegal does not mean that is not available for private use.

• Similarly, if the car is not taxed, insured, or has a valid MOT does not mean it is unavailable for private use.

• If the director had a broken leg meaning that they were incapable of using the car, that does not mean it is not available for private use.

Note also that it is only necessary for a car to be “available” for a BIK to arise. Even if the car is not actually used a BIK will still arise.

Calculation rules for BIK on classic cars

The normal computational rules for car benefit, based on list price and CO2 emissions do not apply to classic cars. If they did, the taxable benefit on a high value car would be negligible, so not surprisingly HMRC introduced different computational rules.

Cars registered before 1 January 1998 do not have a CO2 emissions figure, so the car benefit is calculated by reference to the market value of the car multiplied by the ‘appropriate percentage’ based on the engine size. The percentages are:

0 -1,400 cc                        24%

1,401 – 2,000 cc              35%

Over 2,000 cc                   37%

The fair market value is £1m and in this case the car was over 2,000 cc, so if HMRC were to successfully argue that the car was ‘available’ and therefore a BIK arose the annual BIK would be:

£1,000,000 x 37% = £370,000

This would obviously be taxed at rates of 40%/45% depending on the client’s other income, so it would probably result in an annual income tax charge of £220,000 per annum. This would of course negate the benefit of the initial tax-free gain and it would obviously not make sense to proceed with the transaction in these circumstances.

Avoiding the bear trap

To avoid the BIK rules the client would have to convince HMRC that the car was not “available”.

We therefore submitted a Non-Statutory Clearance seeking confirmation that the BIK rules would not apply.

There was an exchange of letters with HMRC and HMRC’s initial stance was that simply having Board Minutes prohibiting private use was not sufficient to show it was not “available” since it was the director and spouse’s company. Similarly keeping the vehicle on company premises, accessible to the director, also didn’t mean the car wasn’t available.

In the end HMRC agreed a BIK would not arise in the following circumstances:

• At point of sale the car was to be transported by a specialist firm to a purpose-built storage facility 175 miles away.

• All the keys to the vehicle would be held by the specialist firm.

• The vehicle would be insured by the specialist firm and not in the name of the company or the Directors.

• The insurance for the vehicle is only whilst it is in storage and not for road use.

• The vehicle will be transported for repairs and maintenance by the specialist firm.

Anything to worry about in the future?

In this case the holding company purchased the car, so it was one of several investments held by the company. The only thing to watch out for in the future is the level of investment activity. In the future it may be that the level of investments held mean that the overall group becomes an investment company group rather than a trading company group, which might affect the availability of other tax reliefs relating to capital gains tax and inheritance tax.

Next Steps

Our team at ETC Tax have extensive knowledge of both capital gains tax and inheritance tax. It’s essential to have the right advice when dealing with these tax matters as getting the correct advice is crucial.  If you have any questions or need information on the above, feel free to get in touch.