Capital Gains Tax case - Painting worth £9.4 million is exempt from CGT because it is a ‘wasting asset’

25 April 2014

The Court of Appeal has published its eagerly anticipated (by tax geeks at least) judgment in the case of HMRC v The Executors of Lord Howard of Henderskelfe (deceased) ([2014] EWCA Civ 278).

The case concerned a valuable portrait exhibited at Castle Howard.  The painting was owned by a limited company which opened the historic home to visitors.  Around 17 years after the death of Lord Howard, his executors sold the painting for £9.4 million, realising a substantial gain.

They argued that the gain was exempt from Capital Gains Tax (CGT) because it fell within the technical legal definition of a ‘wasting asset’.

This claim was rejected by the First Tier Tax Tribunal but upheld by the Upper Tribunal.  HMRC then appealed to the Court of Appeal.  They did not argue that the painting was not a wasting asset but rather that Lord Howard’s executors could not take advantage of the CGT exemption because they themselves had not used it in trade.

The Court of Appeal rejected the appeal.  They held that there was nothing in the legislation to say that the person benefitting from the exemption had to be the person who had actually used the asset in trade.

The bizarre upshot of this is that a valuable old master painting is treated as a ‘wasting asset’, i.e. an asset with a predictable life not exceeding 50 years, even though it is already much, much older than that.  This is because the law states that ‘plant and machinery’ always has a life of less than 50 years.  And because the painting was an asset ‘used in trade’, it is plant.

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