Sir Joshua Reynolds' portrait of Omai arrived at Castle Howard in 1796, and (apart from brief tours of the world's galleries) remained there until it was sold by the executors of Lord Howard's estate. From 1952 until his death in 1984.
Lord Howard had allowed the company which owned Castle Howard to use the painting as part of its business of charging the public for visiting the house and grounds. This arrangement continued after Lord Howard's death, until funds were needed to fund the present incumbent's divorce. In November 2001 the picture fetched £9.4 million at Sotheby's.
The executors disputed HMRC’s view that Capital Gains Tax (CGT) was payable on the proceeds. This turned on the definition of 'plant' within the CGT code, the significance being that if an asset is classed as plant, it is automatically treated as a wasting asset and can be disposed of with no CGT charge. To meet the definition of plant the asset must be used in a business, and that use must be permanent.
HMRC argued that the use by the company lacked permanence: the executors could demand its return at any time. The tribunal at first instance agreed, and despite accepting that the painting was used in a business, found that business was not that of the executors, who were claiming the relief, but the company's. They denied relief.
On appeal the upper tribunal reversed the first instance decision. HMRC's contention on permanence was rejected: the test was designed to distinguish 'plant' from 'stock-in-trade', being based on long term use, rather than necessarily a permanent right to possession.
Significantly, the tribunal judge found that though the executors did not carry on the business in which the painting was used, they could still claim the relief. If the painting was plant for the purposes of the business in the hands of the company, it could not at the same time not be plant in the hands of the executors, and so they should not be prevented from claiming the relief.
This case will interest those who allow valuable possessions to be used in house opening businesses – particularly under arrangements where trustees own chattels but do not run the business. However, the first tier tribunal did raise the concern of abuse of this type of arrangement, and so HMRC will no doubt scrutinise any claims of this type. We would suggest that forward planning should not rely upon this type of CGT exemption. On the other hand, there may be cases similar to the Castle Howard sale, where CGT has already been paid. Should the relief now be claimed and tax recovered?
Though significant for CGT purposes on sale, this case does not affect the inheritance tax treatment of art and heritage property on death.
For more information please contact Tom Hewitt or Charles Wyld.