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Tribunal Concludes that Sale of Sir Joshua Reynolds Painting Was Exempt from CGT
When Lord Howard died in 1984 his assets included a painting by Sir Joshua Reynolds. Ordinarily, when his executors sold the painting at auction in 2001 for £9.4 million, the gain resulting from the increase in value of the painting from the date of his death would have been subject to 28% capital gains tax (“CGT”).
However, the executors argued that the painting constituted “plant” for the purposes of CGT. Plant is deemed to be a “wasting asset” and wasting assets are generally exempt from CGT. HM Revenue & Customs disagreed and sought to levy CGT on the sale but the Upper Tribunal found in favour of Lord Howard’s executors – the gain was tax free.
To understand the potential significance of the case, it is necessary to look at the facts a little more closely. Both during Lord Howard’s lifetime and after his death the painting was informally loaned to the company that owns and runs Castle Howard, the well-known stately home in North Yorkshire where Lord Howard lived until his death. The painting was on display in the ‘public’ part of Castle Howard– the part that the fee-paying public could look around. The central issue for the Tribunal to decide was whether this was sufficient for the painting to constitute “plant”.
The Tribunal concluded that the painting was being used for the promotion of the company’s trade (running a stately home open to the public in return for admission fees). Further, its use in this way was sufficiently permanent for the painting to constitute “plant”. It was displayed in an established setting within the house and was available to the company for a considerable period of time. It did not matter that there was no formal legal arrangement in place for the loan of the painting.
HM Revenue & Customs’ final argument was that, even if the painting legally constituted plant, it was only plant in the hands of the company (as it was the one using it in its business) and not in the hands of Lord Howard’s executors as owners. However, the Tribunal disagreed. Once it was established that the painting satisfied the legal tests to be plant, it was to be regarded as plant whether one was considering the position of the company or Lord Howard’s executors.
So what is the significance of this case? Not many people live in a stately home in which their personal art collection is displayed to the public. However, the reasoning of the Tribunal could potentially be applied more widely. For example, what if the proprietor of a restaurant (or hotel) with an interest in art loaned some of their collection to the company running the restaurant (or hotel) to display on a long-term basis and then chose to sell one of their pictures? Equally, nothing seemed to turn on the fact the sale was made by Lord Howard’s executors after his death, rather than by him personally during his lifetime.
To discuss the potential impact of this case on your CGT position, or any other aspect of estate planning please contact Tony Millson, Head of Private Client on 020 7583 2222 or email@example.com