The Commissioners of HM Revenue and Customs v The Executors of Lord Howard of Henderskelfe (Deceased)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Rimer,Lord Justice McCombe,Lord Justice Briggs,And |
| Judgment Date | 19 March 2014 |
| Neutral Citation | [2014] EWCA Civ 278 |
| Docket Number | Case No: A3/2013/1568 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 March 2014 |
[2014] EWCA Civ 278
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE UPPER TRIBUNAL
(TAX AND CHANCERY CHAMBER)
Mr Justice Morgan
[2013] UKUT 129 (TCC)
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Rimer
Lord Justice McCombe
and
Lord Justice Briggs
Case No: A3/2013/1568
Mr David Goy QC and Ms Aparna Nathan (instructed by the Solicitor's Office of HM Revenue & Customs) for the Appellants
Mr William Massey QC (instructed by Forsters LLP) for the Respondents
Hearing dates: 3 and 4 March 2014
Introduction
Lord Howard of Henderskelfe died on 27 November 1984. Included in the personal estate that devolved onto his executors was a valuable portrait painted by Sir Joshua Reynolds in about 1775. The picture was of Omai, a South Sea islander. On 29 November 2001, the executors sold the picture at auction at Sotheby's to an unconnected purchaser for a hammer price of £9.4m, from which commission and value added tax totalling £220,900 was deducted. The price represented a substantial gain over the value of the picture at Lord Howard's death 17 years before.
The question for us is whether the executors are chargeable to capital gains tax ('CGT') on the gain. The reasonable man would ask: why not? If he had been skilful enough to acquire an iconic picture (as this was) that he was later able to sell for a price representing a gain, he would have to pay CGT. Why should the executors be in a different position?
The answer, say the executors, is that although the picture was a valuable asset that was likely to, and did, increase in value, it was deemed by section 44 of the Taxation of Chargeable Gains Act 1992 ('the TCGA') to be a 'wasting asset with a predictable life not exceeding 50 years'. That is because during Lord Howard's lifetime, and also after his death until the sale in 2001, it had been included for exhibition in that part of Lord Howard's residence, Castle Howard, North Yorkshire, that was open to the public. Castle Howard has, since 1950, been owned by Castle Howard Estate Limited ('the company') and still is so owned, and it is the company that ran and runs the trade of so opening the house. In these circumstances, the executors say the picture was 'plant' within the meaning of section 44, and so deemed to be a 'wasting asset' even though, statutory deeming apart, it was nothing of the sort. If they are right, they say it follows from section 45(1) that no chargeable gain accrued on the disposal of the picture in November 2001.
The question whether the picture was such a 'wasting asset', and the executors were entitled to the section 45(1) exemption, came for determination before the First-tier Tribunal (Tax Chamber) ('the FTT'). By a decision released on 22 July 2011, the FTT (Judge Radford and Ms Watts Davies) held that the picture was not 'plant', nor therefore a 'wasting asset', with the result that the gain made on its disposal in 2001 was not exempt under section 45(1) from a charge to CGT.
The executors appealed to the Upper Tribunal. By a decision released on 11 March 2013, the Upper Tribunal (Tax and Chancery Chamber) (Morgan J) ('the UT') allowed the appeal and held that the picture was 'plant', and was thus a 'wasting asset' the disposal of which enjoyed the CGT exemption provided by section 45(1).
With the permission of the UT, the Commissioners of Her Majesty's Revenue and Customs ('HMRC') appeal to this court in a bid to restore the decision of the FTT. Mr Goy QC and Ms Nathan represented HMRC, and Mr Massey QC represented the executors.
More facts
I have summarised the essence of the relevant facts. The facts as found by the FTT are set out in [5] of the UT's judgment. The company has carried on the trade of opening part of Castle Howard and its grounds to the public since 1952, and the trade includes the exhibiting of the works of art to the visiting public. Lord Howard owned several works of art. During his life he permitted the company to use many of them, including the picture, for such exhibition. He arranged with the company that it would bear the costs of the insurance, maintenance, restoration and security of the works. There was, however, no formal lease or licence under which the company was permitted to exhibit them, nor was there any provision for the payment by the company to Lord Howard of any hire or rental fee. The arrangement was terminable by Lord Howard at will. Following his death, the executors continued the arrangement on the same terms. The picture was displayed by the company throughout the period of the executors' ownership save for three periods totalling about seven months when it was exhibited in Paris, London and York. Apart from a short period after Lord Howard's death, and the period from 1997 onwards when only two of the three executors were the directors, the executors were the same individuals who were the directors of the company.
Following the sale in 2001, the executors' trust and estate return for the tax year ended 5 April 2002 included as a chargeable gain the gain accruing on the disposal of the picture. In June 2003, the executors sought to amend the return on the basis that the disposal was exempt from CGT under section 45(1). This led to an HMRC inquiry into the return, resulting on 30 April 2010 in a closure notice stating that the gain on the disposal was a chargeable gain: that was on the basis that the section 45(1) exemption did not apply because the picture was not 'plant'. That notice led to the appeals to the tribunals below and to this court.
The legislation
Section 1 of the TCGA charges tax on chargeable gains accruing to a person on the disposal of assets. The picture was an asset. The amount of any chargeable gain accruing on a disposal is, by section 15, computed in accordance with Part II of the TCGA. Section 16 provides that allowable losses are computed in the same way.
Sections 44 and 45, in Part II, under the heading 'Wasting assets', provide:
'44. Meaning of "wasting asset"
(1) In this Chapter "wasting asset" means an asset with a predictable life not exceeding 50 years but so that —
(a) freehold land shall not be a wasting asset whatever its nature, and whatever the nature of the buildings or works on it;
(b) "life", in relation to any tangible movable property, means useful life, having regard to the purpose for which the tangible assets were acquired or provided by the person making the disposal;
(c) plant and machinery shall in every case be regarded as having a predictable life of less than 50 years, and in estimating that life it shall be assumed that its life will end when it is finally put out of use as being unfit for further use, and that it is going to be used in the normal manner and to the normal extent and is going to be so used throughout its life as so estimated;
(d) a life interest in settled property shall not be a wasting asset until the predictable expectation of life of the life tenant is 50 years or less, and the predictable life of life interests in settled property and of annuities shall be ascertained from actuarial tables approved by the Board.
(2) In this Chapter "the residual or scrap value", in relation to a wasting asset, means the predictable value, if any, which the wasting asset will have at the end of its predictable life as estimated in accordance with this section.
(3) The question what is the predictable life of an asset, and the question what is its predictable residual or scrap value at the end of that life, if any, shall, so far as those questions are not immediately answered by the nature of the asset, be taken, in relation to any disposal of the asset, as they were known or ascertainable at the time when the asset was acquired or provided by the person making the disposal.
45. Exemption for certain wasting assets
(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.
(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 (b) of section 38(1) [being acquisition and disposal costs]; 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...
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