Introduction
The coverage of this month’s vintage‑guitar “gold rush” is a reminder that ‘passion’ assets don’t just capture hearts…
Yes, I am talking about the sale of Jim Irsay’s amazing collection of guitars.
Irsay was an American billionaire businessman who died last year. He was the principal owner, chairman, and CEO of the Indianapolis Colts of the National Football League (NFL). At the time of his death, Forbes estimated his net worth at US$4.8 billion.
Now, his wasn’t any old collection of guitars.
The inventory was effectively a who’s who of musicians. Resultingly, we aren’t talking about instruments being sold for a few thousand bucks either.
No sirree. In fact, last week’s sale established a brand new podium when it comes to guitar sales prices, with the following lots being snapped up as follows:
- David Gilmour’s Black Fender Stratocaster: Sold for $14,550,000.
- Jerry Garcia’s “Tiger” guitar: Sold for $11,560,000.
- Kurt Cobain’s Mustang: Sold for $6,907,000.
Each of these is a piece of musical history.
Take David Gilmour’s “Black Strat”. This is not simply a Fender guitar. It is the guitar used to record and perform some of the most recognisable music of the last 50 years, including Comfortably Numb. Its value lies exponentially more in its part in cultural history than it dies in wood and wire.
The same is true of instruments associated with Jerry Garcia. Garcia’s guitars, particularly custom builds like “Tiger”, are deeply tied to the identity of the Grateful Dead and its fan culture. They are not just instruments, they are artefacts of a movement.
And Cobain’s Mustang being the one he was wielding in the school hall in the video for Smells Like Teen Spirit (I might be able to afford the Janitor’s mop, if I’m lucky). For people of my vintage, do I need to say any more?
But what happens when these treasured guitars are sold?
Is the gain taxable… or could the seller avoid the tax man altogether?
Here, let’s remember, we are talking UK.
[Yes, it’s one of those tedious, UK tax-based, parallel universes that I manufacture out of thin air.]
Let’s jam.
The UK tax rules on collectables
Overview
Under UK tax law, most collectable items, from art and antiques to classic cars and guitars, are typically treated as chattels (tangible moveable property) for Capital Gains Tax (CGT) purposes.
Chattels basics
A chattel is a tangible (“touchable”) moveable item and includes items such as handbags, watches, and paintings.
There is an exemption for small value disposals where the proceeds for a chattel are £6,000 or less. If this is the case, you generally don’t need to report any gain, and there is no CGT on the disposal.
If the proceeds exceed £6,000, then CGT may apply. However, the rules can reduce the chargeable gain significantly.
Yes, the completely bonkers and arbitrary 5/3 rule remembered by any person who has ever done tax exams.
If you sell a chattel for more than £6,000, then you effectively calculate a capt on the chargeable gain. That cap is: 5/3 x (disposal proceeds − £6,000).
Anything above this falls down the back of the CGT sofa.
Why? Who knows.
Example
A quick worked example (adapted from HMRC-style worked calculations):
- Buy an antique vase for £2,000
- Sell it for £9,000
- Pay £500 auction fees
Actual gain: £9,000 − £500 − £2,000 = £6,500
5/3 cap: 5/3 × (£9,000 − £6,000) = £5,000
Chargeable gain: the lower figure (£5,000)
But here’s where it gets interesting (well, relatively so, anyway).
Wasting Assets
Generally
An important general exemption from CGT applies to something called “wasting assets”.
45(1) Subject to the provisions of this section, no chargeable gain shall accrue on the disposal of, or of an interest in, an asset which is tangible movable property and which is a wasting asset.[1]
As per s44, a ‘wasting asset’ is an asset with a predictable useful life of no more than 50 years as ascertainable at the time of acquisition[2].
As such, even though the question is only likely to get argued after the asset is sold, you still look at the position as it was when the asset was acquired by the vendor. It is also the case that, if one looks at a chain of ownership, the result might be different depending on the intentions of the person purchasing (see the case study of the iconic musician, Colin Corbyn below).
Plant and Machinery
Or should that be (Robert) Plant and (Rage Against the) Machine(ry)?
Sorry, I won’t do that again[3].
Interestingly, in the context of this article, s44(1)(c)[4] also states that:
“plant and machinery shall in every case be regarded as having a predictable life of less than 50 years…”
However, s45[5] has more to say on the issue of plant and machinery where capital allowances are concerned.
…. But, Capital Allowances?
The wasting asset exemption will not apply where:
“…if, from the beginning of the period of ownership of the person making the disposal to the time when the disposal is made, the asset has been used and used solely for the purposes of a trade, profession or vocation and if that person has claimed or could have claimed any capital allowance in respect of any expenditure attributable to the asset…”
It is worth noting, it does not matter whether they have claimed the allowances. Merely, whether they could have done.
The Executors of Lord Howard of Henderskelfe
In Lord Howard of Henderskelfe’s Executors[6], the Court of Appeal upheld the executors’ that the sale of Sir Joshua Reynolds’ Portrait of Omai for £9.4m was exempt because the painting was treated as a “wasting asset” under these provisions.
Lord Howard died in 1984 owning the Portrait. Castle Howard was owned by Castle Howard Estate Limited (the Company), which ran a business opening parts of the house to the public. The Portrait and other artworks were displayed in the public areas. There was no formal lease or licence, no hire fee, and the arrangement could be terminated at will. After Lord Howard’s death, the executors continued the same informal arrangement. In 2001 they sold the Portrait at Sotheby’s.
The executors initially returned a chargeable gain but later amended their assessment to claim exemption under s45(1)[7]. HMRC disagreed and the dispute ultimately reached the Court of Appeal.
The exemption relied on the wasting‑asset rules for chattels outlined above.
As we’ve seen, s45[8] broadly exempts gains on disposals of “chattels” that are “wasting assets”, subject to important exceptions (including cases involving capital allowances).
So, the key question was whether the Portrait could be “plant”.
If it was plant (as used in the visitor business), it would be treated as a wasting asset and the s45 exemption could apply, even though, in ordinary language, a 200‑plus‑year‑old masterpiece does not “waste”.
HMRC argued, in essence, that the exemption should not apply because:
- the executors were not traders and did not themselves use the painting as plant; and/or
- the painting was not plant because it was not in “permanent employment” in the Company’s business (the arrangement was terminable at will); and/or
- it was conceptually wrong to treat an appreciating Old Master as “plant” or “wasting”.
The Court of Appeal rejected those points.
First, nothing in the wording of s44 or s45[9] restricted the exemption to disposals by the trader who used the asset as plant. The legislation contemplates that the disposer may be someone other than the person using the asset in a trade. Section 45 is the operative exemption provision, and it did not support HMRC’s proposed limitation.
Second, the “permanent employment” language (from the seminal case of Yarmouth v France) was not a requirement of contractual permanence. It was used to distinguish plant (kept to carry on the trade) from trading stock. The tribunal was entitled to conclude that, in reality, the painting was expected to remain available to the visitor business for a considerable (if indefinite) period and that is what happened.
Third, the court stressed that “plant” is identified by function (again, the Yarmouth v France test), not by the asset’s actual predictable life. Once something qualifies as plant, s44(1)(c) deems it to be a wasting asset in every case, whatever its true longevity and even if it is expected to appreciate.
The aftermath – Lord Howard of Henderskelfe
However, probably because of the substantial tax avoidance possibilities arising from this decision, s45 was amended with effect from 6 April 2015 for CGT purposes and 1 April 2015 for corporation tax purposes.
Under new TCGA 1992, s45(3B)[10] , the exemption in s45(1)[11] is disapplied if:
- at any time during ownership of the asset, it has been used as plant in a trade, profession or vocation carried on by another person; and
- the asset would not otherwise be a wasting asset (because it has a predictable life of 50 years or more)
Party well and truly pooped.
“He sells the Gee‑tar on the HMRC?”: A case study
Background
Colin Corbyn needs no introduction. He was the troubled front man and songwriter of the legendary northern grunge band Dry Stone Wall Pilots.
As you will know, they were pioneers of the famous Settle sound. Like the Seattle sound, but with less coffee and more Yorkshire tea.
The gigging musician
Colin wasn’t always a legend. Like other musicians, he cut his teeth following a demanding tour schedule. In those early days, they played 6 days a week in pubs and clubs anywhere from Settle to Carlisle.
In those early days, Corbyn owned a selection of guitars, favouring the Fender (even over its UK rival, Bumper).
What if he sold one?
If he were to sell one, sans that magic star dust, then it is unlikely that they have appreciated in value at all… unless he had acquired a particular vintage model etc.
Even then, there is a good chance that any gains would fall within the special rules for chattels including the exemption or five-thirds cap.
However, could the guitar be a wasting asset in any event, for CGT purposes? If so, it would be exempt.
There are a couple of things to think about here.
Firstly, Colin uses his guitar six days a week and is renowned for his hard playing. He also, part due to the moment and part due to the theatre, he throws his instruments around quite a lot (he doesn’t break them – he is from Yorkshire, after all).
In that context, does our hard working musician’s (unremarkable) guitars have predictable lifes of less than 50 years?
Ultimately, it should not matter for Colin as, if he is playing six nights a week, it is likely the Dry Stone Wall Pilots are a trade.
If the guitar is used as apparatus of a musician’s trade, then it will almost certainly be “plant” for the purposes of s44(1)(c)[12]. Indeed, HMRC’s own manual uses an example of one musician selling an electric guitar to another and says the buyer “can claim [capital allowances] on the guitar”.
However, this is a Pyrrhic victory. This is because Colin’s wily old stoat of an accountant claimed capital allowances on them[13]. As such, the wasting-asset exemption falls away. Further, s47 requires the disposal to be computed as if the asset were non–wasting, with s41 then restricting any loss. Additionally, the capital allowances consequences of the disposal (balancing charge / allowance) must also be brought into account.
But what if the guitar is not used in any business. For example, Colin is merely a hobby musician. Firstly, it is not plant on the ordinary “tool of the trade / apparatus of the business” type analysis.
At that point, the automatic s44(1)(c) deeming rule would only apply if the guitar were “machinery” in itself. This is where the analysis becomes more uncertain.
The term is not defined in the legislation therefore has its natural meaning.
A machine is “a mechanically, electrically, or electronically operated device for performing a task.”
HMRC has published Tax Bulletin 13[14] way back in October 1994. It helpfully(!) sets out the meaning of “machinery” in terms similar to the above. It gives examples, including a number of different types of road vehicle (if you were uncertain!) It also will set the mind at rest for those who own Tompion clocks or oil tankers (I am sure some might own both).
The Bulletin also sets out the difference between a vessel powered by an engine (machinery) and one powered by oars (not machinery).
So, here I go.
An electric guitar is arguably an electromechanical apparatus. String vibration is converted via pickups into electrical signal, which is then processed and amplified. In that sense, it contains a mechanism performing a functional conversion, analogous (in principle) to other accepted machinery.
As such, in my mind, an electric guitar is a machine. The problem with working in tax, and particularly by yourself, whether your conclusion is a ‘eureka!’ moment or a ‘so what moment!?’ Of course, I might be also be wrong. What a fun profession, eh?
But let’s concentrate on me being correct. If I am, then Colin’s electric guitars will be a wasting asset, with complications only arising if and when he uses them in a trading business.
The collector
Fast forward several decades and Colin is, well, kind of a big deal. He is such a big deal that his guitars are now firmly in the collectible category.
Diane Micklethwaite is another person who needs no introduction. As you now, she is on TV’s business pitching show The Reptile House and made here fortune in the panel beating business. The Halifax tycoon also funded the remarkable rise of Halifax Town to the English Premier League.
However, she is also a huge rock music fan. She collects instruments, particularly electric guitars, and has several of Colin’s instruments.
For example, she has Colin’s 1993 Fender Mustang that he famously used in the video (do bands still make videos?) of generation defining song “Put t’wood in t’ole” and his Martin D-18 that he used in the acoustic set on the record breaking “Nowt Tekken Owt” tour.
She is a professional collector and keeps these instruments in hi-tech, climate-controlled display cases.
But what if she was to looking to sell these instruments?
Let’s assume these guitars are now in the $1m + category. Although they’re still chattels, the special provisions for chattels aren’t really going to touch the sides.
On acquisition by Diane, do the guitars have a predictable life of 50 years? Arguably, if they are going to remain in a secure and climatically controlled environment, then yes.
Is it plant? No.
Is it machinery? As above, I think it is. If so, then it is always treated as having a life of less than 50 years.
So, there is certainly an argument that a disposal of the electric guitar by Diane is within the exemption.
That would be a pretty neat result for her.
The Settle Sound
In other news, the town of Settle, in celebration of its famous rock star, has opened an impressive grunge rock restaurant and bar called “The Settle Sound”.
They contact Diane and ask whether she might consider loaning some of her collection to the restaurant. She does this and then later sells them.
Here, let’s assume that the guitars are not machinery for the moment and have a predictable life of over 50 years (as they are being preserved by Diane’s presentation cases).
This where the Henderskelfe case becomes relevant and the subsequent change to the law implemented thereafter.
Prior to Henderskelfe, if the guitars were used to promoter The Settle Sound’s trade and, in their hands, passed the permanence test then the guitars could be plant and therefore a wasting assets within s44[15].
However, that was prior to the 2015 changes that arose as a result of Henderskelfe. Post the change in rules the exemption would be disapplied here because:
- it has been used as plant in the business in The Settle Sound, which is carried on by other persons; and
- we are assuming, in this part of the example, that the guitars would not otherwise be a wasting asset (despite my view being that they ordinarily would be!)
Is that, as they say, that?
The dealer
Well, not quite.
Garry Thewlis of Garry’s Memorabilia Bizarre is the one who buys it.
Now, Gary was an avid autograph hunter when he was a nipper. Then, at university, he also started trading autographs, signed photos and other memorabilia online.
After a few years working as a roadie and session musician he developed this as a full-time trade. He is now an internationally reknowned trader of rock music and film memorabilia with outlets in Soho and New York.
The position for Gary (and his business) is that the purchase of one of the guitars would be an acquisition of trading stock. So, the capital gains rules aren’t relevant at all. Any disposal will be treated as trading income.
This would usurp any argument that the profit was in the capital gains regime (whether company or unincorporated trader).
Now, that is, finally, that.
Conclusion
So, what’s the truth behind the red guitar?
Not three chords…but more of a ‘pentatonic scale’ of takeaways:
- Most guitars are chattels, so the £6,000 threshold and 5/3 rule are the starting point;
- The wasting asset exemption depends on predictable useful life (not age, not value, and not whether similar items have lasted decades);
- Plant and machinery are always treated as wasting assets, but that does not guarantee exemption;
- if capital allowances were or could have been claimed, the exemption is effectively disapplied (s45 / s47), and
- if the asset becomes plant through use in another person’s business, the exemption may be switched off (s45(3B)).
- A working musician’s guitar is likely to be plant (but that often leads to a different taxable outcome rather than an exemption).
- For collectors, the key question becomes whether an instrument is machinery in its own right (arguable for electrics, less so for acoustics), or whether it falls back to the ordinary predictable-life test.
Thanks for staying the course and riffing with me. I appreciate this was a very long article. All Apologies.
In summary…
…All I got was a red guitar, three chords…and a surprisingly complicated tax analysis.
—
[1] TCGA 1992
[2] TCGA 1992, s44(1)
[3] Ok, I probably will.
[4] Ibid
[5] Idid
[6] Lord Howard of Henderskelfe’s Executors v HMRC [2014] EWCA Civ 278,
[7] TCGA 1992
[8] Ibid
[9] Ibid
[10] Ibid
[11] Ibid
[12] Ibid
[13] Even if he didn’t claim them, the fact that he COULD is enough…
[14] Retrieved from paid subscription service. Soz, can’t find public URL!
[15] TCGA 1992