Henderskelfe: Back from the dead

The long-running tax dispute over Sir Joshua Reynolds' Portrait of Omai, sold at auction for £9.4 million in 2001, finally came to an end earlier this year. The last judgment found for the taxpayer, confirming that no capital gains tax was payable in respect of the sale. Later HMRC was refused permission to appeal the decision – and the story was over.

The result was a valuable win for that particular taxpayer. But, perhaps more concerning for HMRC, it also left the door open for other owners of artworks to create, or take advantage of, a scenario similar to that of Henderskelfe. If an owner loaned an artwork to a business (such as a gallery or stately home open to the public) and, some time later, ended the loan and sold the art work, they too might be able to avoid giving rise to a liability for capital gains tax on the sale. This is because the art work, being in long-term or permanent use by a business, could qualify as "plant" under case law tests, which in turn would mean that it qualified as a "wasting asset" for capital gains tax purposes - and sales of wasting assets do not give rise to capital gains tax. While this specific scenario might not be commonly used, the amount of tax at stake could be high as a result of the high value such an artwork might carry.

But with the publication of Finance Act 2015, it looks as though HMRC has risen from the dead to block this possibility. As of 6 April 2015 a change to the law will aim to prevent a recurrence of Henderskelfe. The key to the change is that the owner of an artwork can no longer loan the artwork to a third party business and benefit from the wasting asset exemption. "To qualify for the capital gains tax exemption for gains accruing on the disposal of certain wasting assets," HMRC states, "an asset must have been used in the business of the person disposing of it".

This means that if an art owner ran their own business of (say) opening their stately home to the public, and a painting they owned was on display in that house for the public to see, then the wasting asset exemption might still be available. But loans to other businesses will not be enough to give rise to a capital gains tax exemption.