One of the amendments listed in the Budget this year includes closing a tax loophole that has previously been used to exempt Old Masters from capital gains tax (CGT).
The change has been made following a case involving Joshua Reynold’s 1776 masterpiece, Portrait of Omai. The painting was in the possession of Castle Howard for over 200 years until it was sold at auction in 2001 following the death of Lord Howard. It fetched a hammer price of £9.4million, which was the record for Reynolds at the time.
The sale sparked a legal battle with HM Revenue & Customs, who attempted to impose CGT on the sale. The executors, however, argued that the painting was a wasting asset, and was not liable for CGT. They pointed out that the painting was a long-term loan to the family’s stately home business, and qualified as company ‘plant’ used to boost visitor numbers. Under the Taxation of Chargeable Gains Act 1992, such plants are ‘wasting assets’ and qualify for tax exemption. The case reached the Supreme Court, who ruled in favour of the executors.
Last week HMRC closed off the exemption that led to the court’s decision. The measure, effective from the next tax year, will mean that in order to qualify for exemption from CGT, the asset must be used in the business of the person disposing of it. This means that a painting on loan to other businesses will no longer qualify as a wasting asset.
HMRC say that the change was made in a direct response to the ruling, which could have meant that ‘it would be relatively easy for other parties to set up similar arrangements to avoid CGT.’
‘The measure improves the fairness of the tax system. By ensuring that an asset must have been used in the owner’s business to be eligible for the exemption on its later disposal, it prevents assets, such as works of art, being loaned to and used by another party for a period of time for business purposes simply to qualify for the exemption.’