The phrase “plant and machinery” evokes images of well-used industrial equipment occupying bustling factories.  Families who own important collections of artwork and antiques which they display by opening their houses to the public for a profit may therefore be surprised to discover that their artwork and furniture may in some circumstances be regarded as “plant and machinery”, resulting in several tax benefits.  One such favourable tax treatment is the long-established Capital Gains Tax (CGT) exemption on plant and machinery (in s. 44 of the Taxation of Chargeable Gains Act 1992).  This exemption is framed in very broad terms by deeming all plant and machinery to be “wasting assets” with a useful life of less than fifty years, whether or not that is the reality.  Wasting assets are, in turn, automatically exempt from CGT.

In most cases, plant and machinery used in businesses depreciate in value, giving rise to capital losses when eventually sold or destroyed.  Essentially, the CGT exemption therefore exists for fear that, without it, disposals of valueless plant and machinery might result in capital losses which business owners could offset against chargeable gains.  The corollary, however, is that owners of plant or machinery which may have increased considerably in value (for example, an antique clock or vintage car) can still benefit from the CGT exemption.

This point has exercised HM Revenue & Customs for some time, and in particular in the context of valuable art and furniture used in house opening businesses which on first blush might not appear to be either plant or machinery.  The point was considered by the Court of Appeal in 2013 in the case of The Executors of Lord Howard of Henderskelfe where it held in favour of the taxpayer.  The provisions introduced in last year’s Finance Act are in response to that decision in an effort to curtail the availability of the exemption.

The Lord Howard case concerned a Joshua Reynolds portrait, Omai, which was owned by Lord Howard’s executors, but which for many years had been used in a house opening business operated by Castle Howard Estate Limited.  The Court decided that Omai was ‘plant’ used in a house opening business at Castle Howard.  It also held that it was immaterial that the house opening business was being carried on by a third party, Castle Howard Estate Limited, rather than the executors.  Full CGT exemption was therefore available when Omai was sold by the executors for £9 million.

A new provision introduced in Section 40 of the Finance Act 2015 now limits the CGT exemption just to plant and machinery used in the taxpayer’s ownbusiness.  This new restriction would have prevented the exemption from applying in the Omai case, but for the fact that it came into effect only from 6th April 2015.  The Finance Act 2015 did not, however, disturb the Court’s finding that artwork and antiques are capable of being regarded as plant and machinery in some circumstances.  It therefore remains open for families owning important art and antiques to benefit from this exemption in certain circumstances where they also operate a house opening business themselves.

Robert Keylock is a member of Forsters Private Client Team. He advises families and trustees on the protection and preservation of capital, particularly the owners of traditional landed estates.