A LENGTHY wrangle over whether an 18th century masterpiece at Castle Howard should be exempted from capital gains tax has ended in a test case court battle.

Sir Joshua Reynolds' Omai was displayed at the stately home for more than 200 years before being sold at auction in 2001 for £9.4m, in part to fund the divorce of Simon Howard from his wife, Annette. The tax authorities have been fighting ever since to prove that capital gains tax was payable on the hammer price.

A judge ruled last year that the portrait was “plant or machinery” and, therefore, tax free but Her Majesty’s Revenue and Customs (HMRC) challenged that decision, claiming it defied common sense to describe the masterpiece as “a wasting asset”.

The Court of Appeal has now found that the Old Master was to be classed in the eyes of the law as “plant”, used to boost Castle Howard’s business, rather than an asset on which capital gains tax was payable.

Lord Justice Briggs said the ruling which has huge implications for historic home owners and art collectors may be “surprising” to some, but such a result was an “acceptable if unwelcome side-wind” of complex tax legislation.

Giving the Court’s main ruling, Lord Justice Rimer accepted the claim that the painting constituted “plant” and fell to be treated as a “wasting asset” not subject to CGT.

This was because it had been included for exhibition in that part of Castle Howard open to the public, he said, and thus was kept by the company that owns Castle Howard “for use in its trade”.

He rejected claims on behalf of HMRC that, while the painting was “plant” in the hands of the company, it was not so in the hands of the executors.

Lord Justice Briggs, adding his own judgment, said: “It is, and despite these judgments will probably remain, surprising to those unfamiliar with the workings of Capital Gains Tax, that a famous Old Master like Omai should qualify for exemption from tax on the ground that it either ‘plant’ or a wasting asset, with a deemed predictable life of less than 50 years.

“But this is the occasional consequence of the working of definitions and exclusions which, while aimed successfully at one potential inroad into the charge of tax, unavoidably allow others by what the legislators appear to permit as an acceptable if unwelcome side-wind.”

The portrait of the South Sea islander Omai, painted in 1775, is now owned by John Magnier, the Irish stud owner.