A UK court decision to classify a multi-million work of art as 'plant' will 'offend almost anyone with an inkling of common sense'.
That's the message from Richard Murphy, head of Tax Research LLP, who said the Upper Tier tribunal's decision over a Sir Joshua Reynolds masterpiece was 'surreal' and 'lacked common sense'.
The court decision - which overturned a First-tier Tribunal (FTT) decision - means that in tax law, the Portrait Of Omai, painted in 1776, is 'plant' and a 'wasting asset' and is therefore exempt from capital gains tax.
Murphy, said: 'This case proves three things. The first is the surreal nature of the appeals that some tax practitioners will make for their clients. The second is the lack of common sense applied to many cases by those deciding upon them. The third is the limitation of the GAAR, which is very unlikely to have stopped this claim that will offend almost anyone with an inkling of common sense. The need for more radical reform to ensure that tax is based on economic reality has yet to be addressed.'
The case - Executors of Lord Howard of Henderskelfe (dec'd) [2011] TC 01340 - centred on Lord Howard, who owned the painting. The aristocrat informally lent it to a company that put it on display at his Castle Howard stately home - known to millions as the house from the 1981 Granada TV series Brideshead Revisited and a 2008 cinema release of the same name - as part of the company's 'house-opening trade'.
The executors claimed that the gain accruing on the sale of the painting was exempt from capital gains tax because the painting was tangible moveable property which was 'plant' and therefore a 'wasting asset'.
HMRC disallowed the claim on the basis that the painting was not 'plant'.
The FTT agreed with HMRC and found that because the executors did not have a business, the painting could not be described as 'plant'. For this to be the case, the court ruled, 'it is necessary for the asset to be owned by the business or at the very least leased formally to it'.
The executors then appealed to the Upper Tribunal, which allowed their appeal.
CCH tax writer, Meg Wilson, said: 'The decision could benefit other landed families with valuable art and antiques as items from their collections may be able to be disposed of without incurring capital gains tax.
'However as one of HMRC's submissions at the FTT was that if 'a privately owned asset not used as a business asset by the owner could qualify as plant purely because it was loaned on an informal basis for no charge to a trader [it] would open up substantial tax avoidance possibilities', so even if HMRC don't appeal the case we could see anti-avoidance rules to counter apparent abuse of the ruling.'
The tax ruling marks the latest twist in the painting's colourful history. When Castle Howard trustees put it up for sale in 2001, the Tate put in a bid for £5.5m, but it was bought by a London dealer for £10.3m. Just six months later it was sold on again to an anonymous buyer for £11.6m.
When the new owner applied for an export licence, the UK government put a temporary ban on it leaving British shores to allow the Tate the time to try and raise funds to buy it at the market price.
Despite a wealthy benefactor stepping in with the money, the picture's owner refused to sell and applied for a temporary licence to export the painting to Ireland, which was granted.
Lord Howard died in 1984 and until the painting was sold by the executors of his estate in 2001, the painting continued, under the longstanding arrangement, to be displayed by the company. The painting was first exhibited in 1776 at the Royal Academy.