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HMRC internal manual

Capital Gains Manual

Capital sums derived from assets: section 22(1) TCGA 1992: meaning of ‘derived from assets’

The asset from which a capital sum is derived (case law)

Section 22(1) TCGA 1992 provides that there is:

“…..a disposal of assets by their owner where any capital sum is derived from assets notwithstanding that no asset is acquired by the person paying the capital sum…..” (emphasis added).

Guidance on what constitutes an ‘asset’ for chargeable gains purposes is given at CG11700+.

The meaning of ‘derived from assets’ was considered in Zim Properties Ltd v Proctor 58TC371 (at 391). In that case the court concluded that capital sums within the meaning of the general words in section 22(1) may be derived from assets which are not the immediate source of the receipt. This was considered to be consistent with an earlier view suggested by the House of Lords in O’Brien v Benson’s Hosiery (Holdings) Ltd 53TC241, when the court referred to the need to consider “the reality of the matter”. It was also followed by the Court of Appeal in Pennine Raceway Ltd v Kirklees Metropolitan Council (No.2) [1989] STC 122 (at Ralph Gibson LJ at 133).

The principle which has emerged from case law is that in every case it is necessary to look for the real (rather than the immediate) source of the capital sum (Pennine Raceway Ltd v Kirklees and Zim Properties Ltd v Proctor).

For example, a capital sum received as compensation for physical damage to an asset should be treated as having been derived from the asset itself and not from any statutory right to compensation or any other right of action that came into existence as a result of the damage. This is consistent with Marren v Ingles 54TC76, in which the court considered a situation in which the payment of a capital sum by way of compensation for a damaged asset was preceded by a judgment or settlement which gave rise to a debt for the relevant amount. It concluded that in such a situation the capital sum would be derived from the damaged asset. The availability of relief under section 23 TCGA 1992, see CG15700+, in cases where the capital sum is applied in restoring the asset also supports this view.

Pennine Raceway Ltd v Kirklees Metropolitan Council (No 2) [1989] STC 122, see CG12995, concerned a company which had a statutory right to receive compensation because the value of its licence over land was diminished by the revocation of planning permission. The Court of Appeal held that the compensation was a capital sum derived from the licence over land rather than from the statutory right to receive compensation because the licence lost value by reason of the planning permission having been revoked.

Capital sums derived from rights

The asset from which the capital sum was derived may be identified as an intangible asset such as a person’s ‘rights’. Guidance on ‘rights’ as assets for CG purposes is given at CG12000+. CG12990+ explains how section 22 TCGA 1992 applies to capital sums derived from various types of rights.

Capital sums not derived from assets

In the following cases the courts found that certain capital sums received by way of statutory compensation were not derived from an asset at all.

In Davis v Powell 51TC492, a tenant farmer claimed compensation under section 34 of the Agricultural Holdings Act 1948 (compensation for disturbance after notice to quit an agricultural holding) after agreeing to surrender a lease on receipt of a notice to quit. The court held that the capital sum was not derived from an asset because it was paid as reimbursement for losses or expenses unavoidably incurred by the tenant after the cessation of the lease. It was therefore not liable to capital gains tax.

The case of Drummond v Brown 58TC67 concerned compensation paid to an outgoing tenant of business premises under section 37 of the Landlord and Tenant Act 1954. Approving the earlier High Court decision in Davis v Powell, the Court of Appeal found that the compensation was not chargeable to capital gains tax as it was paid to reimburse the tenant for the incidental costs occasioned by the disturbance caused by the need to move to new premises when his tenancy came to a natural end. In reaching their decision the courts commented that where a tenant surrendered the remaining term of a lease for a cash sum which included statutory compensation the whole of the capital sum received would fall to be treated as consideration for the disposal of an asset, ie the remainder of the tenant’s interest in the lease.

This should be distinguished from the situation in Davenport (Inspector of Taxes) v Chilver 57TC661, where the taxpayer’s property in Latvia had been expropriated by the Soviet Government and she was paid compensation with interest from a share of money held under the Foreign Compensation (Union of Soviet Socialist Republics) Order 1969 to pay such compensation. For further guidance on Davenport v Chilver see CG12995.