Executors of Lord Howard of Henderskelfe (Deceased) v Revenue and Customs Commissioners
| Jurisdiction | UK Non-devolved |
| Judgment Date | 11 March 2013 |
| Neutral Citation | [2013] UKUT 129 (TCC) |
| Date | 11 March 2013 |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2013] UKUT 129 (TCC).
Upper Tribunal (Tax and Chancery Chamber).
Morgan J.
William Massey QC (instructed by Forsters LLP) appeared for the Appellants.
Ms Aparna Nathan (instructed by General Counsel and Solicitor for HM Revenue) appeared for the Respondents.
TCGA 1992, Taxation of Chargeable Gains Act 1992 section 44 section 45ss. 44 and 45 - Whether a valuable painting displayed in Castle Howard was "plant" within TCGA 1992, Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1s. 44(1)(c) - 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 TCGA 1992, Taxation of Chargeable Gains Act 1992 section 44s. 44 - Whether owner of painting entitled to exemption from capital gains tax pursuant to TCGA 1992, Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 1s. 45(1).
The Upper Tribunal has overturned a First-tier Tribunal decision on exemption from capital gains tax in Executors of Lord Howard of Henderskelfe (dec'd)TAX[2011] TC 01340 ruling that a painting owned by the deceased was exempt from capital gains tax as it was "plant" and therefore a "wasting asset".
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 long-standing 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:
2the use of the painting by the company did not satisfy the test as to function as identified by various cases;
3the use of the painting by the company did not satisfy the test as to permanence as identified by various cases; and
4the 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, Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1s. 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.
[1]On 29th November 2001, the Executors of Lord Howard of Henderskelfe sold at Sotheby's a painting by Sir Joshua Reynolds ("the Painting") of Omai, a South Sea islander. The Painting was painted shortly before 1776 and was exhibited at the Royal Academy in that year. It was sold to the 5th Earl of Carlisle in 1796 and it remained at Castle Howard, in Yorkshire, until its sale in 2001. The catalogue prepared by Sotheby's for the sale in 2001 described the Painting as one of the great icons of eighteenth-century art and a symbol of an age which saw unprecedented advances in areas of travel, commerce, the natural sciences and philosophical thought. It was said that the depiction of Omai owed much to Rousseau's idea of the Noble Savage. Omai was noticed by the officers of the Discovery and the Adventure when they anchored off Huahine during Captain Cook's second voyage in August 1773. Omai returned to England on the Adventure and on arrival he was the subject of considerable curiosity in London society. After two years in England, Omai returned to his native land. In 1789, when Captain Bligh visited Huahine in the Bounty, just before the mutiny, he learned that Omai had died.
[2]The question in this case is whether the Painting was a "wasting asset" within Taxation of Chargeable Gains Act 1992 section 44section 44 of the Taxation of Chargeable Gains Act 1992 ("the 1992 Act"). In the absence of any statutory elaboration of the meaning of "wasting asset" it is agreed that it would not be possible to describe such a valuable painting, in good condition (as it was), as a "wasting asset". However, the term "wasting asset" is defined in Taxation of Chargeable Gains Act 1992 section 44section 44 of the 1992 Act. In particular, Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1section 44(1)(c) of the 1992 Act provides that "plant and machinery" will be deemed to have a predictable life of less than 50 years and Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1section 44(1) provides that an asset with a predictable life not exceeding 50 years will be a "wasting asset". Thus, the Painting will be a wasting asset if it was "plant and machinery" within Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1section 44(1)(c) of the 1992 Act. If the Painting was a wasting asset, then the disposal will fall within Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 1section 45(1) of the 1992 Act, which (subject to the potential operation of Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 2section 45(2) or Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 3(3)) produces the result that no chargeable gain arose on the disposal of the Painting. It is agreed that neither Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 2section 45(2) nor Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 3(3) applies in the present case.
[3]The above question came before the First-tier Tribunal (Tax Chamber) ("the FTT") for determination. In its decision released on 22 July 2011, the FTT (Judge Radford and Ms Watts Davies) held that the Painting was not plant and machinery within Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1section 44(1)(c) of the 1992 Act, and therefore was not a wasting asset within Taxation of Chargeable Gains Act 1992 section 44section 44 of the 1992 Act and therefore the gain made on its disposal was not exempt pursuant to Taxation of Chargeable Gains Act 1992 section 45 subsec-or-para 1section 45(1) of the 1992 Act from being considered as a chargeable gain.
[4]The Appellants now appeal to the Upper Tribunal with the permission of the FTT given on 12 December 2011. The appeal is on a point of law only pursuant to Tribunals, Courts and Enforcement Act 2007 section 11 subsec-or-para 1section 11(1) of the Tribunals, Courts and Enforcement Act 2007.
[5]I will set out the facts as found by the FTT. Many of the following findings of fact were based upon a statement of facts which had been agreed by the parties. At paragraphs [6]-[29] of its decision, the FTT held as follows:
6.Lord Howard died on 27 November 1984.
7.He resided until his death at Castle Howard ("the House") in North Yorkshire. The House has been owned by Castle Howard Estate Ltd ("the Company") since 1950.
8.Since 1952, the Company's principal activity as stated in its accounts has been the carrying on of activities relating to land ownership. Specifically it has, inter alia, carried on the trade of opening the greater part of the House ("the Public Part") and the surrounding grounds, and the exhibiting of the works of art within the Public Part to members of the public, in consideration of admission fees ("the House-opening Trade").
9.The Public Part of the House is open all year round apart from certain off-season periods.
10.Lord Howard owned a number of works of art. During his life Lord Howard permitted the Company to use a large number of these, including the Painting, for exhibition in the Public Part in the House-opening Trade. The agreement or arrangement was that the Company would bear the costs of the insurance, maintenance, restoration and security of the works exhibited.
11.During Lord Howard's lifetime there was no formal lease, hire or loan in relation to the use of the Painting by the Company. There was no provision for the Company to pay any hire or rental fee to Lord Howard.
12.This arrangement continued after Lord Howard's death between the Appellants and the Company in relation to the works of art previously owned by Lord Howard and exhibited by the Company.
13.HMRC were told that the Appellants considered that formal loan/hire/lease...
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The Executors of Lord Howard of Henderskelfe (dec) v HM Revenue & Customs FTC/02/2012
...[2013] UKUT 0129 (TCC) Appeal number 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 satisfi......
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The Executors of Lord Howard of Henderskelfe (Deceased) v The Commissioners for HM Revenue and Customs
...[2013] UKUT 0129 (TCC) Appeal number 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 satisfi......