Case Report: Executors of Lord Howard of Henderskelfe (dec’d) v v Revenue and Customs Commissioners  UKUT 0129 (TCC)
Upper Tribunal (Tax and Chancery Chamber).
Decision released 11 March 2013.
Taxation of Chargeable Gains Act 1992, sections 44 and 45 – whether a valuable painting displayed in Castle Howard was ‘plant’ within section 44(1)(c) of the 1992 Act – whether the painting satisfied the test as to function – whether the painting satisfied the test as to permanence – whether the painting was not plant in the hands of the owner who disposed of it when the business in which the painting was used was not that of the owner of the painting but of a company, Castle Howard Estate Ltd – whether painting a ‘wasting asset’ within section 44 of the 1992 Act – whether owner of painting entitled to exemption from capital gains tax pursuant to section 45(1) of the 1992 Act
Lord Howard owned a valuable painting which he informally lent to a company that put it on display to the public in Castle Howard as part of the company’s ‘house-opening trade’. Lord Howard died in 1984 and until the painting was sold by the executors of Lord Howard’s estate in 2001 the painting continued, under the longstanding arrangement, to be displayed by the company. The executors claimed that the gain accruing on the sale of the painting was exempt from capital gains tax because the painting was tangible moveable property which was ‘plant’ and therefore a ‘wasting asset’.
HMRC disallowed the claim that the gain was exempt from capital gains tax on the basis that the painting was not ‘plant’. The First-tier Tribunal agreed with HMRC and found that because the executors did not have a business the painting could not be described as ‘plant’ in their hands, for this to be the case ‘it is necessary for the asset to be owned by the business or at the very least leased formally to it’.
The executors appealed to the Upper Tribunal, which allowed their appeal. Mr Justice Morgan looked at HMRC’s three main arguments which were:
(1)the use of the painting by the company did not satisfy the test as to function as identified by various cases;
(2)the use of the painting by the company did not satisfy the test as to permanence as identified by various cases; and
(3)the trade which the painting was arguably used in was the trade of the company not the trade of the owner who disposed of the painting.
Mr Justice Morgan found that in the case of the first two arguments ‘the painting satisfied the tests as to function and as to permanence in the established test as to the meaning of plant’. With regard to HMRC’s final argument he did not agree that TCGA 1992, s. 44(1)(c) permitted that an asset could be plant in the hands of a person using the asset in their business whilst, simultaneously, not being plant in the hands of the owner of the asset.
The decision could benefit other landed families with valuable art and antiques as items from their collections may be able to be disposed of without incurring capital gains tax. However as one of HMRC’s submissions at the First-tier Tribunal was that if ‘a privately owned asset not used as a business asset by the owner could qualify as plant purely because it was loaned on an informal basis for no charge to a trader [it] would open up substantial tax avoidance possibilities’ so even if HMRC don’t appeal the case we could see anti-avoidance rules to counter apparent abuse of the ruling.