Painting Or Plant?

On 19 March 2014, the England and Wales Court of Appeal handed down its judgment in HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278, a 'wholly extraordinary' case concerning the wasting asset exemption for capital gains tax (CGT) purposes.

The case

The asset in question was an 'old master' painting by Sir Joshua Reynolds, Portrait of Omai, depicting a Pacific Islander brought to England by Captain Cook. It 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 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) TCGA 1992, which HMRC denied. The First-tier Tribunal agreed with HMRC, but the executors appealed to the Upper Tribunal and won. This decision came as a surprise to many and, as expected, there was an appeal. However, the Court of Appeal upheld the Upper Tribunal's decision that the sale of the painting be wholly exempt from CGT, saving the executors what is sure to be a considerable amount.

The legislation

A wasting asset is defined in s44 TCGA 1992 as 'an asset with a predictable life not exceeding 50 years', but there are several qualifications to the rule, one of which concerns plant and machinery. Under s44(1)(c), 'plant and machinery shall in every case be regarded as having a predictable life of less than 50 years' and this is so regardless of the actual predictable life. There are certain exceptions in subsections 45(2) and (3) that apply to assets which qualify in whole or in part for capital allowances (although it was agreed that neither of these applied in this case). The exemption itself is set out in s45 TCGA 1992, which provides that 'no chargeable gain shall accrue on the disposal of, or of an interest in, an asset which is tangible moveable property and which is a wasting asset'.

The case turned on whether the painting could be classified as plant under s44(1)(c). The definition of 'plant' is case-law based, there being no elaboration in TCGA 1992, and the 'classic explanation' is provided in Yarmouth v France (1887) 19 QBD 647. 'Plant' is there described as including 'whatever apparatus is used by a businessman for carrying on his business - not his...