A year ago I reported on the case of Henderskelfe, in which the Upper Tribunal for tax announced an apparently odd decision: that an iconic portrait by Sir Joshua Reynolds, which had been sold for £9.4 million, was a “wasting asset” and that the sale proceeds were therefore exempt from capital gains tax.
The painting’s owners were saved a fortune. HMRC was not pleased, and appealed. More bad news for HMRC: the Court of Appeal’s decision, announced last week, agreed with the Upper Tribunal’s previous judgment and dismissed the appeal.
|Sir Joshua Reynolds' Portrait of Omai, c.1775|
Briefly, the reasoning behind the Upper Tribunal’s decision of last year was as follows. Since 1952, Castle Howard – the ancestral home of the painting’s owners - had been open to the public as a business. From 1952 until its sale the painting was on display in the Castle for the public to see. As a famous painting, it was one of the Castle’s attractions. The painting was therefore in the nature of “plant” – that is, an object retained and used for the purposes of a trade. Anything in the nature of “plant” is automatically deemed by the capital gains rules to be a “wasting asset”, and in turn wasting assets are exempt from capital gains tax. (See last year’s report for more detail.)
HMRC’s arguments that this exemption did not cover the painting were rejected by the Court of Appeal. The Court pointed out that, despite the fact that the painting was clearly not in any factual sense a “wasting” or depreciating asset (quite the opposite), it nonethless passed the tests set out by case law to be “plant” and as a consequence was clearly deemed by the capital gains tax rules to be a “wasting asset” for tax purposes.
The Court also pointed out that the rules which exempt wasting assets from capital gains tax are not intended to be a generous measure allowing the "very occasional gainer from the disposal of a wasting asset to keep the gain tax-free”. By definition, wasting assets will normally be sold at a loss. Take a common example of a wasting asset: an ordinary car. On sale, its owner will almost certainly make a loss, not a gain. But since the car is exempted from capital gains tax, any gain on the sale would not be a chargeable gain, and – crucially – neither is any loss an allowable loss. In other words, the rules prevent the sellers of wasting assets from creating allowable losses which they could use to reduce any tax payable on other chargeable gains made during the year.
The present case is just one of those rare occasions when these normally HMRC-friendly rules work in the taxpayer’s favour.