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HMRC internal manual

Capital Gains Manual

Capital sums derived from assets: section 22(1) TCGA 1992: statutory rights

CG12020 explains the circumstances in which a statutory right is an asset for CG purposes.

If a person is entitled to a capital sum as compensation under an Act of Parliament or under legislation enacted by a foreign government, the sum received may in certain circumstances be treated as deriving from an asset consisting of the recipient’s statutory rights under the Act.

Where a capital sum is received in connection with a statutory right it is essential to establish the facts in order to decide whether the receipt was derived from an asset that gave rise to a statutory claim or whether it derived from the statutory right itself.

Davenport v Chilver
Pennine Raceway Ltd v Kirklees Metropolitan Council
Davis v Powell and Drummond v Brown

Davenport v Chilver

Assets consisting of statutory rights were considered in Davenport v Chilver 57TC661. The case concerned payments received by way of compensation following claims under the Foreign Compensation (USSR) Order 1969 in respect of assets situated outside the UK which had been confiscated by a foreign government.

In Davenport v Chilver a distinction was made between compensation received by the appellant in respect of property which she owned personally and property which had been owned by her deceased mother.

The High Court held that compensation in respect of Miss Chilver’s personal property was derived from the property itself because it was received as a direct consequence of its loss. However, they concluded that the compensation in respect of her mother’s property was derived from a statutory right, ie her right to claim compensation under the 1969 Order as a beneficiary of her mother’s estate, as Miss Chilver had never held an interest in that property.

Our current view is that there is no need to distinguish between the two types of claim so that this type of compensation should be treated as deriving from the recipient’s right to make a claim even if that person was the owner of the asset.

Guidance on the treatment of compensation for deprivation of foreign assets is given at CG13055+.

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Pennine Raceway Ltd v Kirklees Metropolitan Council

In Pennine Raceway Ltd v Kirklees Metropolitan Council (No 2), [1989] STC 122, a company had a statutory right to claim compensation under section 164(1) of the Town and Country Planning Act 1971 for loss of income and other costs incurred as a result of the revocation of planning permission.

The Court of Appeal held that the compensation was a capital sum derived from the company’s licence to conduct drag racing on a disused airfield on the grounds that it had lost value when planning permission had been revoked.

As the capital sum was derived from the company’s licence rather than its statutory rights under the Town and Country Planning Act, part of the allowable costs of the licence fell to be deducted in computing the gain. Had the court found that the capital sum derived from the statutory rights there would have been no allowable costs under section 38(1)(a) and (b) TCGA 1992.

The decision in the Pennine Raceway Ltd case where the value of the company’s licence over land was directly affected by the revocation of planning permission can be distinguished from the decision in Zim Properties Ltd v Proctor 58TC371, where the High Court held that the capital sum was not derived from the company’s interest in land because the land itself was unaffected by the solicitors’ negligence, see CG13015.

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Davis v Powell and Drummond v Brown

The decisions in Davis v Powell 51TC492, and Drummond v Brown 58TC67, indicate that a statutory right to reimbursement of expenses is not a capital sum derived from an asset for the purposes of section 22(1) TCGA 1992.

In those cases the courts found that capital sums received as compensation under section 34 Agricultural Holdings Act 1948 and section 37 Landlord and Tenant Act 1954 respectively were not derived from assets as they were paid as reimbursement for expenses unavoidably incurred due to the termination of tenancies of business premises, see CG12985.

In Drummond v Brown the courts found that the sum received was not compensation for the loss of Mr Brown’s tenancy of his business premises as the lease had not been lost but had come to an end through the passage of time.

In the case of Davenport v Chilver (see above) the High Court distinguished between Miss Chilver’s right to share in a designated fund under the Foreign Compensation (USSR) Order 1969, which it described as an independent proprietary right, and Mr Powell’s right to reimbursement for expenses which he was deemed already to have met. Miss Chilver’s independent proprietary right was a form of property and, therefore, an asset for CG purposes.