Aficionados of ‘collectible cars’ have – and still do – purchased countless classic cars out of both a love for vintage vehicles and to proudly display their showpieces to the world. However, in recent years classic cars are increasingly purchased as an investment by both wealthy and less-wealthy individuals. So when does such an investment become appealing in terms of taxation – when purchased privately or through a company? What follows is an overview of the tax consequences in either case.
1. Classic cars - status
You can purchase a classic car as either a natural person or as a legal entity. The rules are different than those for buying an ordinary car – in order to qualify as a classic car (or ‘oldtimer’, as they are known in Belgium), the vehicle must have been in use for at least 25 years in Flanders and the Brussels-Capital Region and for at least 30 years in the Walloon Region and its vehicle registration plate must start with an ‘O’. This means that the vehicle was first registered at least 25 years ago for use on public roads, which is when one can apply for O vehicle registration plates. These O plates are necessary for paying the reduced annual fixed motor vehicle tax of €35.10 and the registration tax of between €43.99 and €61.50, depending on the region in which you live ((Flemish Region, Brussels-Capital Region or Walloon Region). The latter tax is a one-off fee and is payable when you register the classic car in your name.
Since the new classic car status, applicable since 1 July 2013, a number of major restrictions have been lifted. For example, you can now drive your classic car any time of the day, while previously you were only permitted to use it within a radius of 25 km between sunrise and sunset or as part of a rally. But the new classic car status also involves new (and different) restrictions.
Since 1 July 2013 it has been prohibited to use a classic car to do the following:
- Commercial activities for the purpose of business or personal financial gain;
- Professional activities for the purpose of performing one’s job or business operations;
- Commuting and school runs;
- Paid transport and free transport that is considered the equivalent of paid transportation of persons;
- Activities where a classic car is used as equipment or as a tool, including breakdown activities.
Moreover, a new European Directive was passed in 2014 on inspections for vehicles of historic interest. The Directive underscores that a ‘vehicle of historic interest’ must be manufactured or first registered at least 30 years ago, which means that the minimum age of 25 years must now be raised to 30 years so that Belgium does not lag behind the other member states. The Directive must also be incorporated into national legislation no later than on 20 May 2018, and to date the legislation in Flanders and Brussels has not yet been amended. In Flanders the minimum age for a car to be registered as a classic car is set to be raised to 30 years as of 1 July 2017, with a transitional arrangement for those vehicles that are between 25 and 30 years old and already registered as classics.
2. Private purchase
Over the years the value of classic cars has risen, and all signs point to this continuing in the near future, whether or not at a reduced rate. Moreover, if you want to increase your return on investment, the experts say it is best to go for one of the greats, for which the price can get exceedingly high. But this could also mean a large (maybe too large) investment for you as a private person.
However, when you later sell your classic car at a healthy profit, this capital gain will remain untaxed in your personal income tax if the sale falls within the standard management of your private assets. That will not be the case if you buy classic cars and only possess them for a short time in order to sell them on at an intended profit (speculation) – then you will be subject to personal income tax at a separate rate of 33% on the capital gain realised.
3. Purchase via a company
If you are unable or unwilling to fund such a large investment as a private person and you are the managing director or director of a company, you can alternatively buy the classic car under the guise of the company. The car can then be registered as a classic car with O plates or as a standard vehicle with normal vehicle registration plates. There are advantages and disadvantages for both options.
When you purchase a classic car through a company and it is registered with qualifying O plates, then the regulations as effective from 1 July 2013 must be adhered to, which means that use thereof for commercial and professional purposes is prohibited.
In that case, the company costs for the classic car will always struggle to comply with the conditions for deductibility. Costs are only deductible if, inter alia, it can be demonstrated that the cost has been incurred for the purpose of obtaining or retaining taxable income. Given that a classic car with O plates cannot be used for professional or commercial purposes, the only proof that can be furnished is the increase in value, which does not mean that the costs for it can never be deductible but it does mean that it must be demonstrated that such costs contribute to the increase in value of the car and are not merely for using it. That is because, in the latter case, such a cost is a non-professional cost, as the classic car cannot be used professionally.
While the classic car is in the first place naturally an investment, the temptation will soon become too great when it comes to using a beautiful 1956 Mercedes Gullwing or a 1963 Jaguar E-Type Roadster for commercial purposes. A company event featuring a classic as a showpiece will of course be a true magnet, and while we believe that it would be difficult to consider simply displaying the car as commercial ‘usage’, do note that the car cannot be ‘used’ (i.e. driven) for commercial or professional purposes.
We moreover wish to reiterate that if the car is registered under a company with O plates – which means it cannot be used for commercial or professional purposes – then, as already stated, it is considered purely as an investment that will yield a profit. Investments that are not intended to generate periodic income, such as your classic car, must however be excluded from the net assets for notional interest deduction purposes. This means that you will subtract the value of the classic car from your net assets for notional interest deduction purposes, which means that your notional interest deduction will be less. But, in view of the fact that at present the notional interest deduction is at a historic low and is also often up for debate, a beautiful classic car that you are naturally convinced will deliver a healthy profit can make up for that loss.
Should you still wish to use the vehicle for commercial or professional purposes then you will have to register it with standard vehicle registration plates. If the vehicle is subjected to a standard registration, the reduced motor vehicle tax remains applicable, but both the simplified inspection and the exemption from technical inspection are no longer applicable. Of course one benefit is that the classic car that is registered as standard vehicle is not subject to any legal restrictions, and can be used for professional or commercial purposes.
Do remember that the private use of professional resources will always lead to a benefit in kind being chargeable. If the classic car that your company bought, and which is thus considered to be a company resource, is used for private purposes, then a benefit in kind must be charged, just as it is for an ordinary car. As it is still considered a standard car, we believe that the flat-rate calculation method for benefits in kind (cars) must be applied.
In order to calculate the benefit, the book value and the CO2 emissions must be known. The CO2 emissions as stated on the registration form are used for this purpose. If the emissions are not listed on the registration form, which is often the case for classic cars, then it is determined on a fixed basis at 205 g/km for petrol cars and 195 g/km for diesel-powered ones. The book value can also be difficult to track down, but the Minister has clearly confirmed that if this method of calculation has to be applied, the value is that when bought new – the value when it was purchased as a new car and not the current market value. In most cases there will probably be a record of the prices for the new cars somewhere, which means that the benefit can in principle be calculated. Moreover, in the present age the new price of classic cars is often relatively low. But remember that the benefit in kind does not take into account the distance you travel when using the car for private purposes – whether you drive a single kilometre or 10,000 kilometres, the tax stays the same. If you use the car very little for private purposes, the tax on the benefit in kind will be relatively very high indeed.
In principle it is best to buy a classic car in your private capacity. When done through a company the costs are often not deductible and you will also be taxed for any capital gain, which should not be the case if you own the car as a private person. Unfortunately, it tends to be the company that has the available cash. But in a financial sense it would be best to have the required amount paid out as a dividend and then you can still buy the classic car in your personal capacity. The fact that the profit realised is generally tax-free will mean you gain more than you do on the initial savings on the withholding tax payable on the dividends. Furthermore, the money will (once the classic car is resold) be paid out at some time anyway, which means your company once again pays withholding tax and the capital gain for the company was already taxed.
As you can see, there is unfortunately no ready-made advice when it comes to fiscal policy for classic cars. But if you have any specific questions or would like to see the options set out in a numerical example, then contact the Moore Stephens Business Tax division, which will be happy to examine the details.