Certain assets such as plant, watches and paintings valued below £6,000 are exempt from capital gains tax but there are some restrictions, explains Chris Thorpe, technical officer at CIOT
Within the Taxation of Chargeable Gains Act 1992 (TCGA 1992) are listed certain assets which are specifically exempt from capital gains tax (CGT). One of those is chattels or ‘tangible moveable property’, which is generally anything other than land and real property, under s262 where the proceeds of a disposal is £6,000 or less.
These are generally smaller, multiple, lower-value items for which this section provides a de minimis. Loss relief on the disposal of chattels is restricted should proceeds be under £6,000 but the original base cost be above that – in this case £6,000 will be the substituted base cost.
Also, in the case of sets of chattels (where the total value of the set is greater than the sum of the individual parts), it might be tempting to sell off individual items with their lower values, over a period of time to reduce the overall CGT bill.
However, s262(4) treats those sales as one disposal when made to the same person (or someone to whom the seller was connected or ‘acting in concert’).
What about larger/more valuable ‘tangible moveable property’? Imagine if you own a Rolex watch, valued at £30,000, that is obviously tangible and moveable but given its value it would clearly not come under the s262 exemption.
Does that mean it’s fully chargeable to CGT? The answer is probably not, because of s45 – the watch could be a ‘wasting asset’, as well as a tangible moveable property.
A wasting asset is defined within s44 as an asset with a predictable life not exceeding 50 years, but, significantly within that definition includes all plant and machinery (even if they are likely to last well beyond 50 years in reality).
‘Plant’ is not defined within any legislation, but that definition given by Lindley LJ in the case of Yarmouth v France (1887) 19 QBD 647 is the generally-accepted one: ‘…it includes whatever apparatus is used by a business man for carrying on his business – not his stock in trade which he buys or makes for sale; but all goods and chattels, fixed or moveable, live or dead, which he keeps for permanent employment in his business’.
If the asset meets that definition of plant, using the precedence established throughout the last century, then it will be a wasting asset. However, for that wasting asset to be CGT-free, it must not have been used in a trade, profession or vocation, or been subject to a (potential) capital allowance claim. This means used in any trade, profession or vocation, that of the asset’s owner or otherwise.
The case of R & C Commrs v Executors of Lord Howard of Henderskelfe (decd) ( BTC 12) highlighted the original loophole in the legislation as for ownership, but also looked at whether a painting was ‘plant’ and therefore a ‘wasting asset’.
There are several cases highlighting that decoration and anything that adds to an ambience for attracting customers can be plant (IR Commrs v Scottish and Newcastle Breweries Ltd  BTC 187).
HMRC also accept that paintings can be plant to create the desirable setting as part of the trade, but the Lord Howard case concerned a £10m Joshua Reynolds painting, titled Omai. The painting adorned the family home of Castle Howard but was actually loaned to the limited company which operates the castle as a tourist attraction.
The Court of Appeal held that Omai was indeed plant, but also that because it was not used for the owner’s business (it was used for the company’s), he was able to take advantage of the CGT exemption.
At the time of the case, the CGT exemption was only denied to an asset if it was used in the owner’s trade, profession or vocation. It was because of the outcome of this case that the Finance Act 2015 changed s45 to what we see today – the CGT exemption will now be removed if the asset is used in anyone’s trade, profession or vocation, not just that of the asset’s owner.
So, essentially, plant used for purely private purposes will be exempt from CGT. The same also applies to machinery, ie, anything with a mechanism.
HMRC give some examples of those items which they will regard as machinery: shotguns, road vehicles (besides cars), ships and railway locomotives are regarded as wasted assets (and therefore machinery) within HMRC’s manuals (CG76900–CG76910).
Also included are clocks and watches. While HMRC use Thomas Tompion clocks as an example, no doubt a Thomas Mudge or indeed any mechanical timepiece will be CGT-free if used privately.
Therefore, our privately used £30,000 Rolex watch, while too valuable to be a mere chattel, will qualify as a wasting asset and thus be tax-free. Given that watches tend to increase in value, they could be a very good investment – and a CGT-free label will only add to the attraction.
About the author
Chris Thorpe LLB (Hons) ATT CTA (Fellow) TEP, technical officer at Chartered Institute of Taxation (CIOT)
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