The world of alternative investments can be both fascinating and lucrative. Moving outside the traditional asset classes of stocks, bonds and cash opens up all kinds of possibilities and here we look at some of these alternative asset classes. Classic cars, wine, bloodstock, art and gold are some of the more glamorous options available, but these are not for the faint-hearted or ill-informed. Many require a high minimum investment level and are subject to less regulation than mainstream investments, so should not be entered into lightly.
Associated with luxury, excitement and an iconic era in history, classic cars attract some of the most passionate collectors. The classic car market has shown resilience in recent years. According to the Historic Automobile Group index, classic cars have been one of the best performing investments of the last decade, with an average return of 456%. However, a buyer hoping to purchase a classic car and sell at a profit needs to do their research and know the market.
Certain factors affect the value and collectability of classic cars. Some of these are obvious, such as the condition and rarity of the car, but other important factors, such as race history and cultural significance, are less obvious to a novice.
Although there is money to be made in classic cars, the incentive of many collectors is the pure enjoyment of it. If you are fortunate enough to build a strong collection of cars, you can have the luxury of keeping them as assets and selling some pieces when you receive a particularly good offer. Auctions can be the best place to see cars sell far beyond their estimated value, as the atmosphere and competition of the auction room can send buyers into a frenzy.
The art market represents one of the great unregulated sectors of high value personal property transactions, where the cognoscenti operate in a way that retains echoes of a bygone investment age. However, with an ever-expanding art law market and the introduction of consumer-friendly legislation, more people are entering the esoteric world of art investment.
For those prepared to wait for a return and seek advice on buying, art can bring its own special rewards. Adding art to an investment portfolio, no matter how modest, has the enormous advantage of providing you with works that you can admire everyday while they hopefully increase in value.
Those investing in art need to have a genuine passion for the subject, as the market knowledge required to make wise purchases and sales demands connoisseurship, study, and a great deal of pounding the pavement visiting galleries, art fairs and museums. It’s not work for the pure investor, but it can develop into a great hobby.
Buying wine as an investment is not a new phenomenon. Wine investment is appealing because, despite the recent economic downturn, the value of fine wines remains relatively stable, and the price that wine fetches is not dependent on external factors such as the strength of the property market or the strength of the banks. In addition, there are a limited number of bottles of fine wines, so demand will remain high.
There are about 250 vintners producing the world’s premier wines which are ripe for investment. When choosing a wine you should look out for a very high score for one or more of the leading reviewers, as well as the ability to age further. The best performing wines can produce annualised growth of up to 20%, but be prepared to wait a number of years before receiving a return.
Of course, should your asset not make the return you hoped for, at the end of the day you have purchased something you can consume and enjoy, so wine investment should be seen as a hobby as well as an investment opportunity.
To invest in bloodstock is to invest in the breeding of racehorses, but there are many ways of getting involved. For example you can invest in foals, broodmares (female horses for breeding), stallions, whole breeding operations such as a stud farm, or horses which are still racing.
Bloodstock is an investment in something with a pulse, something that may be victim to fate, which is not listed and certainly not regulated. An investor in bloodstock needs to do their due diligence and to understand their legal protection, whether buying at auction or privately; many deals are still done on nothing more than a handshake.
How one enters the market will depend on your time horizon, appetite to risk, the level of return desired and whether you want actively to trade assets or take a more passive approach. There are no global indices, but the sales results from Tatersalls and Newmarket act as a weather-vane and the signs are that after a considerable slowdown following the financial crisis the market has recovered its momentum.
The purchase of physical gold bars as a truly tangible asset is a popular investment, particularly if you are seeking a serious “survival” insurance to tide you through a turbulent market: at times when equity and bond markets are being hit, gold is often perceived as a safe haven. Between May 2008 and March 2009, the FTSE100 shed 45% of its value. Over the same period the gold price rose by over 40% in sterling terms and continued to rise very strongly, peaking in September 2011.
Like all forms of insurance, the premium rises when the perceived risks increase and vice versa. Various factors affect these rises and falls in price, for example geopolitical and economic risks, as well as simple supply and demand forces.
There are many options for investing in physical gold. The number of different gold bars and coins available on the market has increased, giving much more choice in what gold to buy and in what quantity. When purchasing gold it is important to use a reputable firm and expect to go through a similar due diligence process as for a bank. You will also need to think about storage and again a reputable company should be chosen for this.
General points to consider and seek advice on:
- Anyone thinking of purchasing an asset collection in the UK, or even bringing an existing collection to the UK, should take advice on whether this could give rise to any unforeseen tax charges.
- Trading in certain assets can be taxed as a business and can even attract potentially very valuable relief from inheritance tax.
- If not investing as a business, many assets, including certain wines and cars, are classed as wasting assets for capital gains tax (CGT) purposes, so no CGT is payable on any investment gains.
- Most UK resident domiciles, or non-UK domiciles with assets physically situated in the UK, will be required to pay inheritance tax on the value of their asset collection.
- Lifetime gifts of assets can potentially be exempt from inheritance tax, but to be totally free of tax the donor of the gift must live for seven years after the date of the gift and not retain any interest in the asset gifted.
- Anyone gifting an item which remains in their possession (for example gifting artwork to children but keeping it in the parents’ home) must pay a market rent for the retention of the asset, in order for it not to remain in their estate for inheritance tax purposes.
- A Will, perhaps including tax-efficient trust structures, will secure the destination of an asset upon death and can help tax efficiency.