20 March 2014

Oh my!


The Commissioners of HM Revenue & Customs v. Executors of Lord Howard of Henderskelfe (deceased) [2014] EWCA Civ 278

The Court of Appeal have dismissed HMRC’s appeal and confirmed that the owners of the famous painting of Omai by Sir Joshua Reynolds were exempt from Capital Gains Tax (‘CGT’) on its sale in 2001 for £9.4 million. 

Background

The painting was owned by the late Lord Howard and was exhibited during his lifetime and after his death at Castle Howard.  Castle Howard Estate Limited (the ‘Company’) which owned the property ran a business of opening a large part of Castle Howard to the public and inter alia, exhibiting works of art.  Lord Howard, and following his death his Executors, permitted the Company to use the painting in this trade.  There was no formal license or loan and the arrangement was technically terminable at will.  

‘plant’ and ‘wasting assets’

The Executors had argued that the painting fell within the common law definition of ‘plant’ in Yarmouth v France (1887) and thereby constituted a ‘wasting asset’ under s.44 of the Taxation of Chargeable Gains Act 1992 (‘TCGA’). As a result the Executors were exempt from CGT on the sale, by virtue of s. 45 (1) TCGA. This was accepted by the Upper Tribunal and has now been confirmed by the Court of Appeal.

Most importantly the Court of Appeal confirmed that the s.45 exemption does not only apply to the ‘disposal of plant … by the trader who has used the plant’ but also the disposal by any owner of ‘plant’ in the possession of a trader and used by them in their trade.

This decision is of significance to any owners of valuable chattels that are displayed as part of a house opening trade (or arguably any other trade), regardless of whether the owners themselves are involved in that trade.

There are however a number of caveats to consider:

  • Many paintings and chattels that are displayed in properties run as house opening trades are subjected to conditional exemption from estate duty or inheritance tax and as a result those latent taxes are of far greater concern that CGT;
  • Similarly, many such home owners may not wish to jeopardise their claim for CGT Principal Private Residence relief on their homes by virtue of their homes being part of a trade; and
  • For those individuals on entities running VAT registered businesses that directly own such assets liability to VAT on a sale should be considered.

Nonetheless, owners of valuable chattels should review recent disposals or even consider making disposals if, on their fact pattern, this recent judgement eliminates the CGT sting in the tail. 

HMRC submitted that there was perverseness in a painting painted in 1775 that has only appreciated in value being treated for CGT purposes as a wasting asset with a predictable life of less than 50 years. The Court, however, dismissed this out of hand as being an instance where HMRC must ‘take the rough with the smooth’.  Nonetheless HMRC may seek permission to appeal further or the Government may legislate to block what some may view as an unintended lacuna in the CGT legislation.

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Category: Article