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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Chargeable assets: intangible assets: rights of action

Rights of action as assets

The case of Zim Properties Ltd v Proctor, 58TC371, established that a right to take court action for compensation or damages is an asset for CG purposes.

In that case a company sued its solicitors for negligence on the grounds that an agreement for the sale of an interest in land had fallen through due to errors in the sale contract. The company received a capital sum under the terms of an out of court settlement.

An argument that the capital sum was derived from the company’s interest in the land was rejected on the grounds that the value of the land had not been affected or impaired by the failed contract. However, the courts held that the company’s right of action against its solicitors was an asset consisting of a chose in action (a thing that can be sued for) and that the capital sum was derived from that right.

The rule should be applied by considering what the real source from which the capital sum was derived, rather than the immediate source. Therefore, a person who receives compensation or damages whether by court action, arbitration or a negotiated out of court settlement as a result of a cause of action may, subject to the facts, be regarded as having disposed of or as having derived a capital sum from a right of action. The usual test is whether the underline asset itself is affected. In Zim Properties, the value of the land was unaffected, so the capital sum was derived from the right of action. However, in Pennine Raceways Ltd v Kirklees Metropolitan Council (No.2) [1989] STC 122, the asset was found to be the licence to operate drag racing and not the right of action against the council for revoking planning permission, the effect of which was to make the licence worthless.

A right of action is sometimes referred to as a ‘Zim-style’ right.

An asset consisting of a right of action is not a wasting asset within the meaning of section 44 TCGA 1992. (Section 44 applies to an asset which becomes less valuable over its predictable life, see CG76700.) This is because a right of action will be just as valuable on the day before it is settled or becomes time barred as it was when it came into existence even though the quantum of the compensation may not be known until the right is settled.

Guidance on the treatment of capital sums derived from rights of action is given at CG13015.

Time of acquisition

The time of acquisition of a right of action in relation to the original owner is the time when the right came into existence, for example, when a person suffered actual loss or damage due to the wrongful or negligent actions or omissions of another person.

Allowable costs of acquisition

In most cases there will be no costs associated with the acquisition of a right of action.

A right of action will almost invariably be acquired otherwise than by way of a bargain made at arm’s length. However, section 17(1) TCGA 1992 will not apply to treat it as having been acquired for a market value consideration where there is no corresponding disposal and either no consideration is given for the acquisition or the consideration given is less than the market value of the right (see section 17(2)(a) and CG14550).

A right of action acquired by a legatee on the death of the original claimant is deemed to have been acquired at its market value at the date of death in accordance with section 62(1) TCGA 1992, see CG31160. On a subsequent disposal of the right by the legatee, for example when a capital sum by way of compensation is received, HMRC will normally treat the disposal as producing neither a chargeable gain nor an allowable loss if the market value of the right had not been agreed for Inheritance Tax purposes.

Any legal and professional fees incurred in pursuing a claim of substance (ie a claim that is neither vexatious nor frivolous) are allowable, provided that they satisfy the requirement in section 38(1)(b) TCGA 1992 of having been incurred in establishing, preserving or defending the claimant’s title to or to a right over the chose in action.

An allowable loss will arise in cases where the allowable expenditure exceeds the amount of compensation received or, if the action fails, where no compensation is received.

If necessary, cases of doubt or difficulty should be submitted to the Specialist Personal Tax Capital Gains Technical Group.