This article looks at an asset class that often can set the pulse racing - classic cars. Can dealing in Ferraris, Aston Martins and other princes of the road make robust investment sense, or is this really just a hobby with financial benefits?

An earlier version of this item appeared on WealthBriefing; given the interest in collectibles and "trophy" assets around the world, including Asia, it is republished here. Ronald Graham, corporate partner and a senior member of Taylor Wessing's international private wealth group, examines classic cars. Recent data shows that prices aren’t headed in an automatic northward direction: the classic car market as measured by the HAGI Top 50 Benchmark Index declined in August, losing 2.81 points (-0.95 per cent) compared with July. All of HAGI’s sub-indexes traded lower with the exception of the HAGI P Index (classic Porsche), which managed a gain of (0.65 per cent). The Historic Automobile Group, which puts the indices out, said recent auctions in California (Monterey and Pebble Beach) had dented prices slightly.

Imagine if you can that you were told in 2005 that you could invest in something which would give a return of 400 per cent over the next nine years, which could not go bust, and which was something that you could enjoy and share with family and friends…that "something" is of course classic cars. With a return of 40 per cent in 2014 - in contrast to falls of 18 per cent for watches, 13 per cent for Chinese art and 10 per cent for fine wine - classic cars continue to deliver stellar returns for owners.

RM Auctions Sotheby's Monterey sale stood out last year with over $143 million of sales, becoming the highest grossing collector car auction of all time and included the sale-topping 1964 Ferrari 275 GTB/C Speciale which sold for $26.4 million. RM Auctions Villa Erba sale in 2015 was again notable for the strength of the Ferrari sales, particularly the 1952 Ferrari 212 Export Barchetta, which sold for more than €6 million ($6.67 million).

While the main attention is on the headline grabbing 1950s and 1960s Ferraris, the increased value of other marks, particularly of cars that are good quality, rare and with excellent provenance and racing or show history, indicated that this is a market that is strengthening. In such an active market mistakes made can be at best disappointing and at worst extremely expensive. Given this, it is prudent and timely to revisit what legal advice and legal assistance can be provided to sellers and buyers of classic cars to protect their interests.

Legal risks

Perhaps surprisingly, cars have always been relatively easy to trade. In the UK, the seller signs the title document to show the change of ownership while the buyer is able to register at the DVLA to show that he or she is the new registered owner of the vehicle.

Aside from this document and a brief but essential bill of sale, any sale agreements, warranties, indemnities, legal title reports, or other documents that are more standard in the sale and purchase of other assets are rare.  

It is worth drawing the analogy here with buying a house, because this is a relatively secure process for the sale and purchase of real estate. The lawyer acting for the buyer of a house will ask detailed questions about the property and review the ownership title and any charges in place over the asset. The property will be surveyed; then a sale and purchase agreement will be negotiated, which will include or exclude certain provisions that are specific to the property. Then, once all the terms are agreed and signed, a deposit is usually paid and a period of time is given for the seller to get organised to move and the buyer to get its financing in place before completion occurs and legal title to the property changes hand. If you compare this to the purchase of a car, even a valuable classic car, a prospective buyer will view the vehicle and may ask for a report to be produced on the car; there will then be some negotiations on the price but rarely a sale agreement. Then, once the price is agreed the buyer and seller will shake hands and the car will be transferred.

But:

1. What if the seller was not the owner of the car?

2. What if a lender had a charge over the car?

3. What if the car is a replica?

4. What if the car does not work?

5. What if the provenance of the car is disputed (was it really owned by James Dean or raced at Le Mans)?

These types of questions would have been asked and answered had a similar exercise to the sale and purchase of a house been undertaken and would leave a buyer far more secure about the asset being purchased. In short, undertaking a due diligence exercise on a car's title and provenance should be considered essential.

Of course a car purchased at auction, particularly from an auction house as reputable as RM Auctions Sotheby's, will give the buyer considerable security as the buyer is entitled to rely on the representations made by the auction house in the catalogue. For example, if a car sold is said to be a 1968 Ferrari and in fact it turns out to be a particularly elegant 1967 Fiat, the buyer could sue for misrepresentation. That does not mean a prospective buyer should not do his or her own checks on the vehicle, particularly where some aspect of the car is in doubt. The road worthiness of a vehicle is rarely, if ever, warranted by the seller and so a skilled mechanic should be instructed to survey the car where possible.

Title

It is obviously crucial to establish title to a classic car. This is usually done by way of legal certificate which lists the individual or individuals who own the car, along with other relevant information relating to the registration of the car.

It is also important that you understand any information found on the certificate and that you know how to transfer the title, as you may wish to sell your car in the future.

Contract specification

As with any purchase, it is vital that you clearly understand the terms and conditions of the contract whether buying at auction or privately. This not only includes understanding exactly what you are buying - for example, whether it is just the car or whether other items such as memorabilia, racing records and spares are included in the price. Consideration also needs to be given to import/export dues or other taxes.

Provenance

The provenance of classic cars is particularly relevant to value and, given this, more and more checks are required to ascertain and verify ownership provenance and racing provenance. If this is being represented by a seller, then verification can be sought and the buyer protected should those representations turn out not to be true.

Delivery

The delivery of a classic car can be a key and often overlooked part of the buying process. It can be fraught with legal issues if a car is to be delivered from an overseas destination, particularly one outside of the EU. The buyer will be responsible for import duties and taxes unless it has been agreed that the seller will cover those costs. Checks and protection can be put in place if the car acquired has been used as collateral by a seller and is charged.

There are always examples of cars coming up for sale and indeed being sold which were charged assets and were therefore not within the free control of the seller to sell them. High value cars have been used particularly during times of recession as security for loans from both institutional and private lenders. However, with appropriate legal advice this can be checked and verified and the buyer protected.

Tax and ownership structures

Most classic cars that are acquired are owned by a private individual, which is usually the safest structure for the car ownership. It is also tax efficient, particularly in the UK where there is no capital gains tax on the sale of cars as they are categorised as a depreciating asset by HM Revenue & Customs. However, a high value car in a person's estate would fall within assets considered for inheritance tax on the death of the owner and this should be taken into account on estate planning, something that any skilled law firm with a private wealth practice can advise on. Some individuals who are fortunate to own a collection have their cars held in a trust or separate company to avoid this issue. Taking legal and tax advice on structuring the ownership and long term management of a car collection is prudent and essential to minimise tax on cars.

While the investment potential of some cars cannot be overlooked in the current market, classic cars, like all art forms, should be bought first and foremost for the enjoyment that comes from owning the car.

That said, taking legal advice at the time of purchase of a classic car can ensure that the buyer is protected from the date of acquiring the car, making the ownership of the car more enjoyable and the investment potential more secure.