An appeal court ruling on the tax status of Sir Joshua Reynolds’ masterpiece ‘Omai’ means that a number of very rich people are likely to get a bit richer.
At the heart of the dispute between the owners of Castle Howard
and HM Revenue & Customs was whether the 1776 portrait could be
deemed a 'wasting asset' by qualifying as business 'plant'* and
therefore be exempt from capital gains tax following its £9.4m sale
The executors of Lord Howard of Henderskelfe put their case
successfully first in the High Court and then, when HMRC appealed,
in the Court of Appeal. The executors argued that since the
portrait formed an integral part of the Castle Howard estate in
that it was a primary attraction for visitors, and was part of the
apparatus used by a trading company, it qualified as 'plant' under
the Taxation of Chargeable Gains Act 1992.
A point of hot dispute between the executors and HMRC centred on
the painting's ownership.
As ATG legal columnist Milton Silverman and his colleague
Michael Lindley explained when analysing the case a year ago in ATG
No 2085, there was a longstanding but informal agreement between
Lord Howard, who owned the estate, and the company that ran the
estate, Castle Howard Estate.
Lord Howard permitted the use of his works of art, including
Omai, for exhibition at the castle and, in return, the
company would bear the costs of insuring, maintaining, restoring
and the security of the works. The arrangement continued after Lord
Howard's death in 1984.
HMRC argued that in order for the painting to be considered
'plant', it would have to have been used as such by its owner, i.e.
Lord Howard or his heirs in their business, not simply by the
separate business, Castle Howard Estate. Not so, said the
executors. Under the terms of the Act, they argued, it was not a
necessary condition that the owner of the object had to employ the
object in their own trade, just that the object had to have been
used in the course of trade.
The judges agreed.
Lord Justice Briggs, sitting with two fellow Court of Appeal
judges, explained that while the ruling might seem surprising to
some, it was the result of definitions under the law targeted at
one area having an unintended but unavoidable consequence on
Calling the ruling "a poke in the eye for the Inland Revenue",
Mr Silverman told ATG: "This was a highly technical case and will
certainly raise some eyebrows.
"It's continuing good news if you are landed gentry with
masterpieces worth tens of millions of pounds, cash poor and asset
"As this painting is thought by many to be Sir Joshua Reynolds'
greatest masterpiece, some may think describing it as a 'wasting
asset' is rather curious, if not insulting. However, this was the
Court of Appeal, not a National Museum. Such is the power of
statute - to defy common sense."
* Section 44(1)(C) states: plant and machinery shall in every
case be regarded as having a predictable life of less than 50
years, and in estimating that life it shall be assumed that its
life will end when it is finally put out of use as being unfit for
further use, and that it is going to be used in the normal manner
and to the normal extent and is going to be so used throughout its
life as so estimated.
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