Painting Is A Wasting Asset For CGT Purposes

The Court of Appeal handed down its judgment in HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278 on 19 March 2014 in an interesting case on the scope of the capital gains tax (CGT) wasting assets exemption.

Fact of the case

The wasting asset in this case was a painting, an 'Old Master' 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 GBP9.4 million, triggering a substantial capital gain. The executors claimed an exemption from CGT under s45 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) on the basis that the painting was 'plant and machinery' and consequently a wasting asset within the meaning of s44(1)(c) of TCGA 1992, which HMRC denied. The First-tier Tribunal agreed with HMRC but the executors won their appeal in the Upper Tribunal and the Court of Appeal has now upheld that decision: the Omai painting is a wasting asset for CGT purposes.

Definition of 'plant and machinery'

The decision that a valuable piece of 18th century art can be classified as a wasting asset will come as a surprise to many, when, tax definition aside, the Omai painting is nothing of the sort. The Court of Appeal even conceded this. However, as the Court confirmed, they could find no legislative intention in the definition of 'plant and machinery' to justify excluding the Omai painting from its ambit.

The general rule is that a wasting asset is one with a predictable life expectancy not exceeding 50 years (s44(1) TCGA 1992), but 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'. There is no statutory definition in TCGA 1992 but the classic explanation in Yarmouth v France (1887) 19 QBD 647 is that 'plant and machinery' is goods and 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 judgment

In the Lord Howard case, the painting had been loaned to...