CG12060 - Chargeable assets: intangible assets: rights of action
Rights of action as assets
Time of acquisition
Allowable costs of acquisition
Legal and professional fees
Rights of action as assets
The case of , 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 underlying 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 , 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 s44 TCGA92. (s44 TCGA92 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, s17(1) TCGA92 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 s17(2)(a) TCGA92 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 s62(1) TCGA92, see CG31140. 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.
Legal and professional fees
Any legal and professional fees incurred in pursuing a claim of substance (i.e. a claim that is neither vexatious nor frivolous) are allowable, provided that they satisfy the requirement in s38(1)(b) TCGA92 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 Capital Gains Technical Group.