Executors of Lord Howard of Henderskelfe (Deceased)
| Jurisdiction | UK Non-devolved |
| Judgment Date | 22 July 2011 |
| Neutral Citation | [2011] UKFTT 493 (TC) |
| Date | 22 July 2011 |
| Court | First Tier Tribunal (Tax Chamber) |
[2011] UKFTT 493 (TC)
SMG Radford (Tribunal Judge) (Chairman), R Watts Davies FCIPD, MIH
Mr William Massey QC for the Appellant
Ms Aparna Nathan, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents
Appeal against a charge to capital gains tax on the sale by the Appellants of the painting Omai by Sir Joshua Reynolds which was owned by them and lent to the Castle Howard Company which displayed the painting - appellants claimed that they were entitled to relief under Taxation of Chargeable Gains Act 1992 section 45s. 45 of the Taxation of Chargeable Gains Act 1992 on the basis that the painting was plant in the hands of the Company and a wasting asset - appeal dismissed
1.This is an appeal by the Appellants against the amendment of the Appellants' trust & estate tax return for the tax year 5 April 2002 made by a closure notice issued by the HMRC dated 30 April 2010.
2.In the closure notice HMRC stated that their conclusions in making the amendment included that the gain accruing on the disposal by the Appellants of a painting entitled "Omai" by Sir Joshua Reynolds ("the Painting") was chargeable to capital gains tax.
3.The principal issue for determination in this appeal was whether the Appellants were entitled to relief under Taxation of Chargeable Gains Act 1992 section 45section 45Taxation of Chargeable Gains Act 1992 ("TCGA 1992") in relation to the gain that accrued on the disposal of the Painting on the basis that the Painting was "plant" in relation to the Appellants and, therefore, a wasting asset.
4.If it is held that the Appellants are not entitled to relief under section 45 TCGA 1992, there is a secondary issue as to the amount of the chargeable gain. The parties have agreed that the Tribunal does not need to determine the secondary issue at this stage of the proceedings. In the event that the parties cannot subsequently resolve the secondary issue they will seek to restore the hearing in order for the Tribunal to determine quantum.
5.Evidence was given by Mr Simon Howard, one of the executors of the estate.
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 Limited ("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 arrangements were unnecessary given that the directors of the Company and the executors of Lord Howard's Will (the Appellants) were the same individuals.
14.The Appellants continued the longstanding arrangement whereby the Company was responsible for the insurance, maintenance, restoration and security of the Painting.
15.The Painting was conditionally exempted from inheritance tax on the death of Lord Howard on the basis of certain undertakings. In the event that the Painting was sold the exemption would be lost. The undertaking meant that the Painting had to be kept in the UK and seen by the public.
16.The Painting was displayed by the Company throughout the Executors' period of ownership (November 1984 to November 2001) except for 3 periods totalling approximately 7 months in all when it was exhibited at three galleries in Paris, London and York respectively.
17.During the tax year 2001-02 the Executors sold the Painting at auction at Sotheby's on 29 November 2001 to an unconnected purchaser for a hammer price of £9.4 million from which commission and VAT totalling £220,900 was deducted.
18.The Appellants' trust & estate tax return for the tax year 5 April 2002 was submitted on 29 January 2003 and included the gain accruing on the disposal of the Painting as a chargeable gain.
19.By letter dated 10 June 2003 the Appellants sought to amend the return on the basis that the gain accruing on the sale of the Painting was exempt from capital gains tax by virtue of Taxation of Chargeable Gains Act 1992 section 45section 45 of the TCGA as a gain accruing on the disposal of a tangible movable property which was "plant" and therefore, by virtue of Taxation of Chargeable Gains Act 1992 section 44 subsec-or-para 1section 44(1)(c) of the TCGA, a wasting asset.
20.On 12 January 2004, HMRC opened an enquiry into the Appellants' trust & estate tax return. On 30 April 2010 after some lengthy correspondence HMRC issued a closure notice stating the conclusion that the gain accruing on the disposal of the Painting was a chargeable gain not exempted by section 45 of the TCGA because the Painting was not "plant".
21.The Appellants appealed the closure notice on 28 May 2010. They also notified HMRC that they required a statutory review of the matter in question.
22.On 5 August 2010 the Reviewing Officer informed the Appellants of his conclusion which upheld the closure notice issued by HMRC on 30 April 2010 in full.
23.Mr Simon Howard gave evidence that the executors had power under the will to license the Company to use any of the chattels forming part of the estate. There was however no formal agreement.
24.A focal point of the rooms on display was the room in which the Painting was hung.
25.He was required to live at the House in order to look after it and he has a lease with the Company.
26.On cross examination he confirmed that given that the works of art were essential to the House-opening Trade. They were on a perpetual loan to the Company but there was nothing to stop the Appellants moving items away from the exhibits and they were at liberty to move them around from time to time. Items might be taken out of use and vice versa. This was arbitrary and there was nothing formal.
27.However Mr Howard said that in order to justify the admission fees the items were vital to the House-opening Trade. If you took away the number of visitors who came to see the works of art the Company would no longer have a viable business.
28.He believed that the reasons why members of the public visited the House were to appreciate its architectural qualities, to admire its historic contents, and to understand the range of historical narratives underpinning the history of the house. He believed that the art collections at the House were and had been, in his experience, central to bringing to life the house and the history surrounding it in the eyes of its visitors and for that reason proved a very considerable draw to the visiting public.
29.The Painting was sold because he needed the money for his divorce settlement. The proceeds went into the estate. There was no benefit to the Company and the proceeds were split equally between the beneficiaries.
30.Section 45(1) of the Taxation of Chargeable Gains Act 1992 ("TCGA") relevant to the 2001/02 tax year states:
(1)Subject to the provisions of this section, no chargeable gain shall accrue on the disposal of, or of an interest in, an asset which is tangible movable property and which is a wasting asset.
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(2)Subsection (1) above shall not apply to a disposal of, or of an interest in, an asset-
(a) if, from the beginning of the period of ownership of the person making the disposal to the time when the disposal is made, the asset has been used and used solely for the purposes of a trade, profession or vocation and if that person has claimed or could have claimed any capital allowance in respect of any expenditure attributable to the asset or interest under paragraph (a) or paragraph (b) of section 38(1); or
(b) if the person making the disposal has incurred any expenditure on the asset or interest which has otherwise qualified in full for any capital allowance.
(3)In the case of the disposal of, or of an interest in, an asset which, in the period of ownership of the person making the disposal, has been used partly for the purposes of a trade, profession or vocation and partly for other purposes, or has been used for the purposes of a trade, profession or vocation for part of that period, or which has otherwise qualified in part only for capital allowances-
(a) the consideration for the disposal, and any expenditure attributable to the asset or interest by virtue of section 38(1)(a) and (b), shall be apportioned by reference to the extent to which that expenditure qualified for capital allowances, and
(b) the computation of the gain shall be made separately in relation to the apportioned parts of the expenditure and consideration, and
(c) subsection (1) above shall not apply to any gain accruing by reference to the computation in relation to the part of the consideration apportioned to use for the purposes of the trade, profession or vocation, or to the expenditure qualifying for capital...
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Executors of Lord Howard of Henderskelfe (Deceased) v Revenue and Customs Commissioners
...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 Summary Lord Howa......