When capital assets are disposed of, capital gains tax (CGT) must be considered, but when assets other than ‘real property’ and intangibles like shares are sold, there is the possibility that no tax is payable at all.
A Chattel
A chattel is defined within Administration of Estates Act 1925, s 55(x) as:
‘tangible moveable property, other than any such property which consists of money or securities for money, or was used at the death of the intestate solely or mainly for business purposes, or was held at the death of the intestate solely as an investment’.
Antiques, jewellery, books, art, objets d’art, and books are common examples of these tangible assets which can be picked up and moved.
If the chattel is sold for £6,000 or less, any gain is free of CGT; if purchased for more than £6,000 and sold for less than that, the proceeds will be deemed as £6,000 to restrict the loss.
If the proceeds are more than £6,000 but less than £15,000, the gain is restricted to 5/3 of the excess over £6,000 proceeds (e.g., if the proceeds are £8,000, the gain can be no more than (£2,000 x 5/3 =) £3,333).
It might be tempting, if the donor has multiple chattels which make up a set which is more valuable than the sum of its parts, to sell off a chattel at a time below the £6,000 exemption (HMRC gives examples of books by the same author or matching ornaments, e.g., vases or statuettes).
Wasting Assets
Chattels with a predictable life of 50 years or less are ‘wasting assets’; included within that definition is ‘plant and machinery’. Wasting assets are exempt from CGT but only insofar as they are not used in a business and thus, potentially, qualify for capital allowances – that means any business, not necessarily that of the chattel’s owner. This stems from the case HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278, where a Joshua Reynolds painting was held to be plant and thus a wasting asset for CGT purposes; but the question was whether the substantial capital gain arising from the painting’s subsequent sale in November 2001 was exempt from CGT; whilst it was used in a business and capable of being subject to capital allowances, it was not used in Lord Howard’s business and thus exempt (rather it was loaned to a limited company charged with overseeing the hospitality business within Castle Howard). The legislation was subsequently changed (in Finance Act 2015) to disapply the CGT exemption if the asset is used in someone else’s business.
Court cases throughout the last hundred years have helped define what is capable of being ‘plant’ in particular, and thus whether it qualifies for Capital Allowances; the Capital Allowances Act 2001 has pulled together the outcomes of many of those cases to produce a list (List C within CAA 2001, s 23) of assets which escape the definition of buildings, structures assets and works which are excluded from benefitting from capital allowances.
Plant is essentially anything tangible besides land or buildings and plays a role or is used as a tool for carrying on the activities of a trade; machinery is generally (as the name implies) an asset with moving parts, but will also include computers, along with mechanical watches and motor vehicles (though private cars are already exempt from CGT).
Practical Tip
Whether a chattel is capable of being plant is a question of fact and how it is employed; the £6,000 exemption is a useful one, but beware of the aggregate application when selling a set of chattels to the same person.