Wasting assets in the frame

Tax cases are not always interesting. But earlier this month the Upper Tier Tax Tribunal made a fascinating decision about capital gains tax (CGT) in relation to the sale of a well-known painting by Sir Joshua Reynolds.

The portrait was of South Sea Islander Omai, who gained a degree of fame in the late 18th century when he was brought to England by Captain Cook. It was displayed at the Royal Academy in 1776, later sold to the Earl of Carlisle and kept at stately home Castle Howard in Yorkshire for many years, where latterly it was on public display. In 2001, the painting fetched the second-highest price any English painting had achieved at the time.

The Upper Tier Tax Tribunal decided that the executors who sold the painting were not liable to CGT by virtue of the relevant legislation about wasting assets. In relation to CGT, a 'wasting asset' has a predictable life not exceeding 50 years.

How can this apply to an old master painting that is already 200 years old and may well survive 200 more? It seems extraordinary, but it all comes down to the particular statutory definitions. Wasting assets, which are 'tangible moveable property', are exempt from CGT, and 'plant and machinery' is always to be regarded for CGT purposes as having a predictable life of less than 50 years.

These provisions already produce some quite well-known anomalies. For example, clocks are mechanical and therefore benefit from exemption on this basis and yet, of course, many clocks are of considerable value and have a life well beyond 50 years.

Core argument

The Omai case focused on whether the painting constituted 'plant' because Castle Howard is open to the public and the painting was on display to visitors. It was argued, on behalf of the executors, that people visited the castle because of the architecture, history and, crucially, the items on display.

'Plant' is normally associated with rather more mundane artefacts, such as office furniture. However, it seems right that, in the business context of opening a stately home to the public, the works of art and furniture on display are plant.

There were a number of technical arguments in the case because the house-opening business was not itself run by the executors and there was some focus on the specific arrangements for using the painting in the business. But, in principle, it seems fairly clear that in an operation such as this, unusual (indeed unique) items can genuinely be considered 'plant' for the purposes of CGT.

Cautionary note

But a note of caution must be sounded: HMRC may appeal the decision or amend the legislation. Where items are on display in a house-opening business, the detail of any situation would need to be examined with some care to ensure that the provisions are applicable on a disposal.

The Tribunal Judge raised the question, which had not been argued, as to whether the painting ceased to be plant between being removed from Castle Howard and being sold at auction. The position about the possibility of claiming capital allowances would need to be looked at where owner and trader are the same person.

Nonetheless, while this is not a case of enormously wide application, for businesses that involve displaying valuable works of art, it is a positive decision and a lesson to us all in the importance of statutory definitions.

Natasha Hassall is a partner in the private client and tax team at Boodle Hatfield