HM Revenue and Customs v The Executors of Lord Howard of Henderskelfe

For capital gains tax, the exemption for disposing of tangible movable property that is a wasting asset is not confined to a disposal by the trader who used the asset. The inquiry focuses on the asset disposed of. If a chattel is plant under the test in Yarmouth v France, it is deemed by section 44(1)(c) of the Taxation of Chargeable Gains Act 1992 to be a wasting asset, regardless of its actual longevity, and section 45(1) can apply when its owner disposes of it. “Permanent employment” distinguishes plant from stock-in-trade; it does not require formal tenure or an irrevocable right of use. The assessment is prospective. Use expected to continue indefinitely may satisfy the test even if terminable at will.

Lord Howard’s executors sold a valuable Reynolds portrait in 2001 at a substantial gain. Castle Howard Estate Ltd had exhibited it in its trade for decades under an informal arrangement terminable at will, while the executors owned it.

The First-tier Tribunal held that the picture was not plant and that the gain was chargeable. The Upper Tribunal reversed that decision, holding that it was plant and that the gain was exempt under sections 44 and 45(1) of the Taxation of Chargeable Gains Act 1992: [2013] UKUT 129 (TCC). HMRC appealed. The central issues were whether the exemption applied where the owner disposing of the asset was not the trader who used it, and whether the picture satisfied the plant test.

Rimer LJ gave the leading judgment. McCombe LJ and Briggs LJ agreed. HMRC’s appeal was dismissed.

1. Disposer’s identity. Section 44 of the Taxation of Chargeable Gains Act 1992 defines a wasting asset but does not confine the section 45(1) exemption to a disposal by the trader who used the plant. The references in section 44(1)(b) and (3) to the person making the disposal concern the predictable life and residual value of the asset.
2. Scope of the exemption. Section 45(1) focuses on the subject matter of the disposal: tangible movable property that is a wasting asset. It expressly includes a disposal of an interest in the asset. The language of sections 45(2) and (3), particularly section 45(2)(a), also recognises that the disponor may be someone other than the trader, including a lessor capable of claiming capital allowances under section 42 of the Capital Allowances Act 1968.
3. Plant test. Under Yarmouth v France (1887) 19 QBD 647, plant is apparatus kept for permanent employment in a business, as contrasted with stock-in-trade. “Permanent” describes the enduring employment of the item in the business, not the legal nature of the trader’s tenure. The test is applied prospectively. The company’s expected indefinite use of the picture, despite the arrangement being terminable at will, was sufficient.
4. Identity and longevity. The plant was the picture itself, not merely the company’s limited right to use it. In any event, section 45(1) covers a disposal of an interest. Once an item qualifies as plant, section 44(1)(c) deems it to be a wasting asset in every case. Its exceptional longevity and increasing value therefore did not prevent it from being plant.
5. Purposive context. Briggs LJ emphasised that interpretation should focus on the purpose of the statutory provisions rather than unusual examples. The legislation did not disclose any rational basis for treating an owner’s disposal differently from a trader’s disposal of the same plant. Rimer LJ also made a provisional observation that “plant and machinery” is a composite phrase to which the Yarmouth test applies, but that issue was not decided.

• Court of Appeal (Civil Division): dismissed HMRC’s appeal and upheld the Upper Tribunal’s conclusion that the picture was plant and its disposal exempt.
• Upper Tribunal (Tax and Chancery Chamber): allowed the executors’ appeal and held that the picture was plant: [2013] UKUT 129 (TCC).
• First-tier Tribunal (Tax Chamber): held that the picture was not plant and that the gain was not exempt from capital gains tax.