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Reynolds portrait was ‘plant’ for tax purposes

Portrait was 'wasting asset' despite rising value and exempt from CGT

26 March 2014

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A portrait by Sir Joshua Reynolds of a young South Sea islander could be regarded as 'plant and machinery' and was not liable for capital gains tax, the Court of Appeal has ruled.

Known as 'Omai', the picture was hung at Castle Howard and was on view to the public, before being sold at auction for £9.4m.

The court heard in HMRC v The Executors of Lord Howard (deceased) [2014] EWCA Civ 278 that Castle Howard Estate Limited had owned the castle since 1950 and "runs the trade" of opening the house.

Lord Howard of Henderskelfe died in 1984, but it was not until 2001 that the executors sold the painting at auction. The question was whether they were liable to pay tax on the "substantial gain over the value of the picture at Lord Howard's death 17 years before".

Lord Justice Rimer said the executors argued that the picture was a 'wasting asset' under Section 44 of the Taxation of Chargeable Gains Act 1992, because it had been on public view, even though it was likely to increase in value over time.

The First-tier Tribunal (Tax Chamber) held that the picture was not 'plant and machinery' or a 'wasting asset', but this was reversed in the Upper Tribunal.

Giving the leading judgment in HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278, Rimer LJ said the test was not whether the picture had a 'predictable life of less than 50 years or less' but whether or not it passed the test in Yarmouth v France.

Once the item qualified as 'plant', Rimer LJ said, in every case it would be deemed to be a 'wasting asset' and covered by Section 44 of the Act.

He said that for HMRC to argue that an item of plant enjoying unusual longevity was "not plant at all" was to "advance an argument that the section expressly excludes and which amounts to no more than a pointless beating of the air".

Rimer LJ went on: "On the facts of this case, section 44 may have proved inconvenient to HMRC. They must, however, take the rough with the smooth; and this case may be an example of the rough."

Lord Justice Rimer dismissed HMRC's appeal. Lord Justices McCombe and Briggs agreed.

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Tax & Wealth structuring