Finance can often be a dirty word and there is a common misconception that finance is about affordability. Of course there are instances where this is true when people do not have the capital reserves to make a large purchase, but in reality the reasons for financing are often more nuanced. With interest rates at historic lows over 90% of new cars were purchased using finance in 2019. The normalisation of finance for new vehicle purchases has in turn brought new products to the specialist car finance market which provide more flexibility to wealthy owners and the way in which they manage their financial plans. The type of vehicle is clearly relevant – there is a difference between financing a new Range Rover daily driver that could depreciate 40% in the first three years of ownership and financing a limited production specialist vehicle with unique provenance. Paying for a quickly depreciating asset with debt is perhaps less palatable amongst the wealthy than purchasing a vehicle with a more predictable future value. In the same manner, there is always a clear distinction between those vehicles for which ownership is a necessity and those purchased out of passion. There is no argument that buying cars with cash is the cheapest route to ownership, but cost is often not the only consideration. There are a number of reasons why wealthy clients turn to us to assist them in accessing finance.
The first and perhaps most common reason for people to finance a car or an asset is to retain a certain level of liquidity. While one may have enough capital to purchase a car outright, financing keeps cash in the bank for other opportunities – property purchases and development, investments, or capitalising on unexpected business expansion opportunities. Specialist vehicles don’t always sell quickly, by retaining cash and financing a vehicle, wealthy owners can avoid having to dispose of a vehicle via a fire sale should an unusual situation arise. A black swan event, such as the current coronavirus pandemic, can quickly create issues that would have been otherwise difficult to predict and finance allows wealthy individuals to hedge the risk of owning illiquid assets.
Many wealthy business owners are able to withdraw profits from their business to fund the purchase of a new vehicle. However, for
high rate tax payers taking a dividend from their company would often mean paying Dividend Tax (in the UK 38.1%). Rather than do this, many decide instead to take advantage of low interest rates and finance their purchase. To purchase a vehicle for £100,000 a high rate tax payer would have to take a dividend of over £160,000 from their limited company. Instead of creating a tax liability of £60,000 they can instead gain the advantage of investing the full £160,000 by keeping it in the business for the price of the interest on the loan.
One of the more recent developments in the specialist car finance market is the emergence of equity release, which is perhaps one of the more typical ways in which a high net worth individual (HNWI) would access finance. Little is known or understood about how many HNWI structure their lives and portfolios but many do not have a regular monthly income, often taking a nominal salary with the remainder of their income coming from property or share sales, dividends or other ventures. The lack of a regular income does not necessarily result in a low income, when looked at over a five-year period, however revenue streams can be difficult to predict. Equity release allows individuals to smooth the peaks and troughs to ensure funds are available for regular outgoings by borrowing against an asset which they already own, for example by releasing £100,000 from a vehicle valued at £500,000. During the period they are still able to retain full use of the asset.
Equity release allows HNWI to release capital from their vehicles to help grow their collection – helpful when that prized piece comes to market unexpectedly, or perhaps to fund the restoration of another car which they already own. It also allows those who compete in motorsport to budget for their season effectively by releasing funds to help with racing costs or perhaps even fund a transporter. By utilising the capital built up in their vehicles, wealthy clients can avoid committing further capital to fund their passion and instead make the vehicles work for them in a more financially intensive way. Specialist car finance is no longer a simple question of affordability, but instead a tool to help structure the often complex financial situations of a wealthy clientele.
Published for Historic Motor Racing News, April 2020