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 Castle Howard Estate Limited (the company) and exhibited at Castle Howard as part of the trade of opening the house to the public. The executors argued, and the Court agreed, that this use by the company satisfied the Yarmouth v France test. It did not matter that the executors themselves did not employ the painting in a trade, nor did it matter that the loan between the executors and company was informal; the long-standing and indefinite nature of the loan (49 years in total) was enough to constitute 'permanent employment'. In the end, despite it defying common sense to classify the painting as a wasting asset, the Court advised HMRC that with tax definitions, they must take the rough with the smooth, and this was one example of the rough.
It is the application of 'plant and machinery' to a high-value heritage asset that will attract interest. Particularly so for owners of other stately homes who exhibit valuable heirlooms such as paintings, sculptures and furniture to the public as part of a tourist business. It also serves as a reminder that the wasting asset exemption is not defined by the actual predictable life of a chattel and need not be restricted to stereotypical examples of 'plant and machinery' that depreciate in value over time; other classes of chattel, heritage or not, can benefit provided there is the requisite commercial link.
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