Analysis
Lord Howard of Henderskelfe was the owner of a painting by Sir Joshua Reynolds portraying a South Sea Islander called Omai. When he died on 27 November 1984, the painting devolved to the respondents as part of his estate and, eventually, they sold it at Sotheby’s on 29 November 2001 for £9.4m which, after deduction of commission and value added tax, represented a substantial gain over the value of the painting at the date of death. Ordinarily, the gain would be chargeable to capital gains tax and, initially, it was classified as such in the respondents’ trust and estate return for the year ended 5 April 2001. However, in June 2003, they sought to amend the return on the basis that the disposal of the painting was a wasting asset and therefore exempt from tax within the meaning of s45(1) of the Taxation and Chargeable Gains Act 1992 (TCGA). This led to an HMRC enquiry that resulted in a closure notice dated 30 April 2010 to the effect that the exemption did not apply because the painting was not ‘plant’ and therefore the disposal was a chargeable gain. The First Tier Tribunal (Tax Chamber) had found that the painting was exhibited at Castle Howard in North Yorkshire, which was open to the public, during Lord Howard’s lifetime and after his death, without any formal lease or licence, as part of the works of art used in the trade carried on by Castle Howard Estate Limited (company). By a decision released on 22 July 2011, it was held that the painting was not ‘plant’ and, therefore, not a ‘wasting asset’ but, on appeal, this was reversed in a decision released on 11 March 2013 by Morgan J in the Upper Tribunal (Tax & Chancery Chamber). HMRC appealed.
Held (dismissing the appeal)
Section 45(1) TCGA, derived from para 1 of Sch 12 to the Finance Act 1968, provided that no chargeable gain should accrue on the disposal of, or of an interest in, an asset which was tangible movable property and a wasting asset. It was probably introduced not to benefit taxpayers with a new exemption for gains on disposals of tangible moveables but to foreclose their opportunity of achieving allowable losses on such disposals. Section 44(1) TCGA defined ‘wasting asset’ as an asset with a predictable life not exceeding 50 years and, in the case of plant and machinery, such assets were deemed to have a predictable life of less than 50 years. This definition, which had a separate statutory origin (derived from para 9 of Sch 6 of the Finance Act 1965) whose purpose had nothing to do with exemption from chargeable gains or even exclusion of allowable losses, was designed to prevent those disposing of plant and machinery from arguing that, because such assets had a predictable life of more than 50 years, the computation of gains and losses on disposal should admit the deduction of the full acquisition cost, rather than the written down cost attributable to wasting assets. However, as with the similar benefit enjoyed by the owners of vintage cars in respect to the provision designed to prevent depreciating assets from generating allowable losses, this reference to ‘plant and machinery’, while successfully blocking one potential inroad into the charge to tax, necessarily could not avoid the allowance of another by what the legislators appear to have permitted as an unwelcome side wind. The word ‘plant’ in the phrase ‘plant and machinery’ had a long history and had been described in Yarmouth v France (1887) 19 QBD 647 as including whatever apparatus was used by a businessman for carrying on his business; not his stock and trade which he bought or made for sale, but all goods and chattels, fixed and movable, live or dead, which he kept for permanent employment in his business. In short, the painting was ‘plant’, and thus a deemed ‘wasting asset’, in the hands of the company as it had been used on a permanent basis for the promotion of its trade at Castle Howard. Once it had passed the ‘permanence’ test referred to, it was ‘in every case’ deemed to be a wasting asset, whatever its predictable life. HMRC had argued that, if the painting was ‘plant’ in the hands of the company while being used for the purposes of its trade, it was not plant in the hands of the respondents since they carried on no trade or business and, therefore, the exemption could not apply. This was rejected – while only items used in a trade, profession or vocation could constitute ‘plant’ in the possession of the trader whose business it was, there is nothing in the legislation to limit the exemption to a disposal by the trader who has used the plant. On the contrary, the indications such as they were pointed away from that conclusion and thus contemplated the possibility of a disposal by persons (such as a lessor or licensor of the plant) other than the user or trader. The focus was on the subject matter of the disposal, namely tangible movable property which was a wasting asset, or an interest in such an asset. Moreover, the exceptions from the exemption showed that it was not intended to be confined, in the case of the disposal of plant, to a disposal by the trader. The company had a sufficient interest in the plant by virtue of its prospective use for an indefinite period, and the ‘permanence’ test referred to in case law was not purporting to identify the type of tenure to which the trader must be entitled in order for plant to qualify.
JUDGMENT LJ RIMER Introduction [1] Lord Howard of Henderskelfe died on 27 November 1984. Included in the personal estate that devolved onto his executors was a valuable portrait painted by Sir Joshua Reynolds in about 1775. The picture was of Omai, a South Sea islander. On 29 November 2001, the executors sold the picture at …Continue reading "HMRC v Lord Howard of Henderskelfe (dec’d) [2014] EWCA Civ 278"