The England and Wales Court of Appeal has held that an “Old Master” painting is a “wasting asset” for Capital Gains Tax (CGT) purposes.
The wasting asset in this case was a painting by Sir Joshua Reynolds depicting Omai, a Tahitian brought to England by Captain Cook. The painting had been owned by the Howard family and kept at Castle Howard since 1796, but on 29 November 2001 the executors of the late Lord Howard of Henderskelfe sold it for £9.4 million.
This triggered a large capital gain. The executors claimed an exemption from CGT under s45 of the Taxation of Chargeable Gains Act 1992 (all section references are to the TCGA Act) on the basis that the painting was “plant and machinery’ and consequently a wasting asset within the meaning of s44(1)(c).
HMRC as you would expect considered the sale of the asset to be subject to a capital gains tax charge.
The First-tier Tribunal agreed with HMRC but the executors won their appeal in the Upper Tribunal.
The general rule is that a wasting asset is one with a predictable life expectancy not exceeding 50 years. However, all forms of “plant and machinery” are wasting assets regardless of the particular asset’s life expectancy. The case therefore hinged on the definition of ‘plant and machinery’. The classic definition of “plant and machinery” is found in Yarmouth v France (1887) 19 QBD 647: “chattels which are ‘apparatus used by a business-man for carrying on his business’ and ‘which he keeps for permanent employment in his business’”.
The main factor in The Court of Appeal coming to this possibly surprising decision is that when it analysed the TCGA 1992 it could not find any reason to justify excluding the Omai painting from being “plant and machinery”.
The Court of Appeal acknowledged that its judgement may be defying common sense to classify the painting as a wasting asset but advised HMRC that with tax definitions, they must take the rough with the smooth. I suspect that we may hear that comment being repeated in future cases.
“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.”
The full judgement, which also outlines in full the relevant parts of the 1992 Act, can be found here.
