Malcolm Finney points out how a South Sea Islander managed to modify our capital gains tax legislation some 250 years later.
On 29th November 2001, the Executors of Lord Howard of Henderskelfe sold at Sotheby’s a painting by Sir Joshua Reynolds of Omai, a South Sea islander. The painting was completed 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 for £9.4 million.
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.
No CGT liability
HMRC were very clear that the significant capital gain arising on sale of the painting fell subject to capital gains tax (CGT).
Although successful at the First-tier Tribunal, HMRC were not successful in the Upper Tribunal, with which the Court of Appeal subsequently agreed, which found that no CGT was due on the significant gain made by the executors. HMRC applied for leave to appeal to the Supreme Court but were refused.
‘Wasting assets’ and ‘plant’
At the heart of the argument was whether the painting was a ‘wasting asset’ for CGT purposes.
A chattel constitutes tangible moveable property (e.g. the painting) which for CGT purposes is exempt from CGT if its value is £6,000 or less; clearly inapplicable to the painting. However, where a chattel qualifies as a ‘wasting asset’ any gain on disposal is exempt irrespective of the size of the gain. A wasting asset is an asset with a useful predictable life of 50 years or less (e.g. caravans, yachts, etc.). Surely then, the painting could not qualify as a wasting asset.
However, under the CGT legislation, if the painting qualified as ‘plant’ then, as plant, it would be deemed to be a wasting asset and hence exempt from CGT. Thus, the crux of the argument was whether the painting could fall to be treated as plant.
Did a painting quaify?
HMRC argued that to qualify as plant the painting had to be a wasting asset in the hands of its owner, Lord Howard of Henderskelfe, not in the hands of Castle Howard Estates Ltd in whose trade the painting was in fact used.
The Upper Tribunal rejected HMRC’s argument based on the fact that the relevant legislation did not require that the painting be used in a trade carried on by its owner. Judge Morgan said:
‘ …….. the meaning of plant in section 44(1)(c) of the 1992 Act does not permit a finding that an asset is plant in the hands of a person using the asset in his business but, at the same time, not plant in the hands of the owner of the asset. I conclude that the Painting was plant within section 44(1)(c) of the 1992 Act and in the absence of any argument that the Painting had ceased to be plant a short time before it was disposed of by the Executors, the Executors are entitled to the exemption conferred by section 45(1) of the 1992 Act.’
Lord Justice Rimmer in the Court of Appeal stated:
‘In my view, the critical provision is section 45. This is the section providing the CGT exemption and so it is in this section that Mr Goy must, if he can, identify an intention that, in the case of plant, only disposals by the trader who has used it are disposals capable of enjoying the exemption. In my view, not only is there nothing in section 45 that supports that conclusion, it in fact points away from it.’
And so the executors managed to escape a significant CGT charge.
Practical Tip:
HMRC’s apparent motto of ‘When you lose, change the rules of the game’ was again adopted by amending TCGA 1992, s 45 (effective April 2015) to make it clear that the wasting asset exemption applies only if the person selling the asset has used it as plant in their own business.
So the floodgates, post Howard, remain firmly closed to landed estates hoping to make use of the courts’ favourable decisions.
