Alternative investments in art pieces or high-value collectables can bring a double benefit – they're assets that generally become worth more in the long term, and you get the pleasure of owning and enjoying beautiful possessions. But does simply owning these types of assets expose you to a tax liability because their value tends to increase over time?

If you sell a regular car or used household goods, the South African Revenue Service (SARS) generally won’t tax the sale because SARS doesn’t consider you a trader – someone who buys and sells goods for profit. Does the same apply to assets bought as an investment? If you sell personal assets that have commercial value, like art, antiques, classic cars, coins, jewellery or other collectables, will you be liable for capital gains tax (CGT)?

Here’s what you need to know:

Alternative investments and personal finance benefits

Alternative investments are an effective addition to a diversified personal investment portfolio, and a profitable way to build value in your estate to leave as a legacy to your family. Because they are physical possessions with tangible value, they retain their worth more resiliently than intangible financial assets linked to market sentiment.

If you buy high-value assets (for example artworks, iconic vehicles, rare whiskies and wines, or historic artefacts) as personal collectable items in your private capacity, you are not liable for any tax. This benefit is limited to assets acquired for personal enjoyment and aesthetic value.

Tax compliance: When does CGT apply?

Private ownership is key to this benefit. Even if your alternative investment increases in value, you are not liable for CGT when you sell it – provided you own it in your personal capacity. That’s why some investors favour investment in tangible assets over other asset classes like bonds and shares, or newer asset types like cryptocurrencies, all of which are subject to CGT.

However, if you buy an alternative investment asset through a company or a trust, CGT will apply when you sell the asset, whether to a private individual or another company or trust. Even in your personal capacity, if you buy these types of assets regularly to resell at a profit, SARS could consider you a trader rather than a personal collector. Any items used for the purpose of trading for profit are subject to income tax because SARS sees you as running a business of buying and selling.

Perhaps the best example of how this works is an art collection. The artworks of a private collector are exempt from tax if people are not charged to view the art – even if the artworks have appreciated considerably in value (like those of South African artists William Kentridge, Irma Stern or Gerard Sekoto). On the other hand, an art gallery that charges an admission fee or sells art would be liable for tax on its profits and income tax on the artworks it owns.

Luxury assets and your estate

While many categories of luxury assets, like fine art, classic cars and rare whiskies, often outperform more conventional market returns, they can be subject to tax when they form part of an estate. It’s important to understand the implications if, for example, you want to pass your art collection on to your family.

Following any death in the family, different components of an estate may be subject to various taxes, including income tax, CGT and estate duty. The specific tax liability will depend on the type of asset and any outstanding taxes for which the deceased was liable.

Fortunately, fewer tax conditions apply specifically to luxury goods owned in your personal capacity when they are included in your estate. Executors and beneficiaries should take note of the following:

• Income tax: Art and other luxury assets will not have income tax implications.
  
  
• CGT: When art or other collectables in the deceased estate are sold, or transferred to an heir, CGT will not apply. If these assets are classified as assets for personal use, they are exempt.
  
  
• Estate duty: Art and other luxury assets will be included in the estate for estate duty purposes. Their value may be subject to estate duty at rates of 20% or 25%, depending on the gross value of the estate. The executor of the estate will need to obtain valuations of art or any other luxury assets for estate duty purposes.

Apart from being a highly portable asset, art is something that your family can enjoy while knowing that it attracts a relatively low tax burden. When you’re planning your estate, keep in mind that possessions like art, luxury collectables and high-value assets allow you to pass the value on to your family while reducing the tax liability of your deceased estate.

Get professional advice about the specific tax implications of luxury asset investments before committing to an alternative investment strategy. If you are considering investing in art specifically, consult market experts in your preferred artform to discuss your budget, goals, and investment options.