This article is by Natasha Hassall of Boodle Hatfield, the private client law firm, in London. She writes about what might, at first glance, appear to be a bizarre case of whether a historic work of art should fall liable for tax or not due to the painting being a “piece of machinery” used to draw visitors to a historic building. As always, while this publication is delighted to share such views with readers – and invites readers to respond – it does not necessarily endorse all the views of the author or authors.

Tax cases are not always interesting, but a recent decision of the Upper Tier Tax Tribunal has produced a fascinating decision on capital gains tax in relation to the sale of a well-known painting by Sir Joshua Reynolds. The painting in question was the portrait of Omai, a South Sea islander who gained a degree of fame in the late 18^th century when he was brought to England (by Captain Cook). Reynolds’ portrait of him was displayed at the Royal Academy in 1776, was later sold to the Earl of Carlisle and kept at Castle Howard in Yorkshire for many years, where latterly it was on public display. The painting was sold in 2001 and fetched the second highest price any English painting had achieved at the time.  The decision of the Upper Tier Tax Tribunal is that the executors who sold the painting were not liable to capital gains tax by virtue of the relevant elements of the capital gains tax legislation concerning “wasting assets”.

A “wasting asset” in relation to a capital gains tax means an asset with “a predictable life not exceeding 50 years”.  How then can an old master painting, which has already had a life of over 200 years and might well be expected to survive for as long again, be considered to have a predictable life not exceeding 50 years?  It seems extraordinary, on the face of it, but it all comes down to the particular statutory definitions.  Wasting assets which are “tangible moveable property” are exempt from capital gains tax and “plant and machinery” is always to be regarded for capital gains tax purposes as having a predictable life of less than 50 years.

These provisions already produce some quite well known anomalies. For example, clocks are mechanical and therefore benefit from exemption on this basis and yet, of course, many clocks are of considerable value and have a life well beyond 50 years.

In the Omai case, the argument focused on whether the painting constituted “plant” because Castle Howard is open to the public and the painting was on display to visitors.  It was argued on behalf of the executors, that people visited Castle Howard because of the architecture, history and, crucially, the items on display. “Plant” is normally a word one would associate with rather more mundane artefacts, office furniture for example, but it seems entirely correct that in the context of a business of opening a stately home to the public, that the works of art and furniture on display do indeed constitute plant in that business.  There were a number of technical arguments in the case because of the fact that the house opening business was not itself run by the executors and there was some focus on the specific arrangements for the use of the painting in the business, but in principle it seems fairly clear that in an unusual business such as this, unusual (indeed unique) items can genuinely be considered “plant” for the purposes of CGT.

A note of caution has to be sounded. HMRC may appeal the decision or amend the legislation. Where items are on display in a house opening business, the detail of any situation would need to be examined with some care to ensure that the provisions are applicable on a disposal. The Tribunal judge himself raised the question, which had not been argued, as to whether the painting ceased to be plant between being removed from Castle Howard and being sold at auction. The position in relation to the possibility of claiming capital allowances would need to be looked at where owner and trader are the same person.

Nonetheless, whilst not a case of enormously wide application, for businesses that involve the display of valuable works of art, this is a positive decision and a lesson to us all in the importance of statutory definitions.