Tuesday 19 March 2013

Sir Joshua Reynolds' portrait of Omai is a 'wasting asset'

The Upper Tribunal has announced that Sir Joshua Reynolds' famous portrait of the South Sea Islander Omai, sold in 2001 for £9.4m, is a 'wasting asset' - and accordingly, that no capital gains tax is payable on the proceeds.

However did they work that one out?

Before its sale, the painting was on display in Castle Howard. The castle had been owned since 1950 by a company which ran a business exhibiting the castle and grounds to the public. But the painting itself was owned by Lord Howard and, at his death in 1984, passed to his estate. First Lord Howard, and later his executors, allowed the company to exhibit the painting on an informal basis, with no lease or licence for its use in place. 

Following the portrait's sale in 2001, the executors stated that no tax was payable on the sale proceeds. This, they argued, was because the painting fell into the definition of 'plant and machinery' (or more specifically, plant) for the purposes of section 44 of the Taxation of Capital Gains Act, which in turn meant that it was automatically deemed to be a 'wasting asset' under section 44 - and wasting assets are not subject to capital gains tax. 

This argument failed in the First Tier Tribunal (tax). The executors appealed in the Upper Tribunal. 

Surprising as it initially sounds, the higher tribunal agreed with the executors' reasoning. There is no statutory definition of 'plant', and so in determining whether the painting was plant the tribunal considered tests set down in case law. These tests required that to be plant, the painting must satisfy:

(1) the 'function test' - i.e. it must be used for the purposes of the trade carried on by the company; and
(2) the 'permanence test' - i.e. it must have a sufficiently permanent place in that trade (this test prevents trade stock falling into this definition).  

The Tribunal held that painting was used in the company's trade. It was one of the attractions of the castle and helped bring in visitors. And whilst not owned by or formally leased to the company, it had been displayed in the castle on an indefinite basis and had in fact been in situ from 1952 to 2001. This was deemed to satisfy the test of permanence. 

HMRC's main argument against the idea that the painting was plant was based on the fact that the painting was used in the company's trade, while the painting itself was owned not by the company but by the executors - so that the painting was not plant in the executors' hands, and capital gains tax was therefore payable. But the tribunal held that the painting, having satisfied the two tests, was plant; the legislation did not permit a finding that it could be plant in one party's hands and not in another's. 

In short, odd as the conclusion seems at first sight, Reynolds' Omai was indeed a wasting asset for capital gains tax purposes and the lucky executors had no capital gains to pay. Anyone selling a valuable artwork which has been used for business purposes (whilst not being stock) may be interested to learn of this wide definition of 'plant' and the unexpected results to which its application may lead. 

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