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HMRC internal manual

Capital Gains Manual

Capital sums derived from assets: section 22(1) TCGA 1992: extra statutory concession D33

Extra Statutory Concession D33 (ESC D33) was published in December 1988 in order to alleviate certain unintended results following the decision in Zim Properties Ltd v Proctor 58TC371, see CG13015.

It applies only in situations where a capital sum has been derived from a right of action. It does not apply where a capital sum has been derived from any other type of asset including statutory rights, see CG12995, or contractual rights, see CG13000.

Underlying asset

Paragraph 9 of ESC D33 provides that:

“Where the right of action arises by reason of the total or partial loss or destruction of or damage to a form of property which is an asset for capital gains purposes, or because the claimant suffered some loss or disadvantage in connection with such a form of property, any gain or loss on the disposal of the right of action may by concession be computed as if the compensation derived from that asset, and not from the right of action.”

Where a right of action arises because an asset has been totally or partially lost, destroyed or damaged, we now consider that any capital sum received by way of compensation should be treated as having been derived from the asset itself rather than the right of action, see CG12985. Therefore, our current view is that the concessionary treatment is confined to situations where the recipient of the capital sum has suffered a loss or disadvantage “in connection with” a form of property which is an asset for capital gains purposes.

Paragraph 9 of ESC D33 enables the recipient to treat the capital sum as if it had been derived from the ‘underlying asset’ that was the cause of the action rather than from the right of action itself. This means that a proportion of the allowable costs of the underlying asset may be deducted in computing the gain, see CG12945. If the underlying asset was acquired on or before 31 March 1982 see CG16700+.

Paragraph 10 of ESC D33 provides that any reliefs or exemptions that would have been available on a disposal of the underlying asset are available by concession subject to the statutory conditions for such reliefs or exemptions being satisfied. HMRC will consider extending any statutory time limits for reliefs in circumstances where there has been a delay in obtaining a capital sum by way of compensation.

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No underlying asset

A right of action may be acquired in connection with a matter which does not involve a form of property which is an asset for capital gains purposes. This type of situation may occur:

  • where a professional adviser has given misleading advice, for example, in connection with a tax or other financial matter or
  • in relation to private or domestic matters.

In this situation Paragraph 11 of ESC D33 applies and the sum is, by concession, exempt. Paragraph 11 was amended from 27 January 2014 to limit the exemption. The effect of this change is not retrospective so it is important to establish when the sum was received to determine whether the original or amended version of Paragraph 11 will apply.

Original version of Paragraph 11 (before 27 January 2014)

Paragraph 11 of ESC D33 provides that any gain accruing on disposal of a right of action in circumstances that do not involve an underlying asset will, by concession, be treated as exempt.

Amended version of Paragraph 11 (From 27 January 2014)

The amendment to Paragraph 11 of ESC D33 introduced a threshold of £500,000 to the concession. A gain of £500,000 or less accruing on disposal of a right of action in circumstances that do not involve an underlying asset will, by concession, be treated as exempt.

If the gain on a payment awarded in a single set of legal proceedings exceeds the threshold then only the first £500,000 will continue by concession to be exempt and the excess will be chargeable as a gain.

The threshold applies to the total payments from each set of legal proceedings. A person may receive payments from multiple legal proceedings and up to £500,000 from each set of proceedings is, by concession, exempt. In cases where a person receives more than one payment it is important to establish whether any of the sums received are in fact from the same set of legal proceedings. The threshold must be applied to the total received from a set of legal proceedings rather than to each individual sum received.

If a person receives a payment that exceeds the threshold a claim can be made to HMRC for the amount above the threshold also to be exempt. See CG13021 for more details regarding claims.

Before applying the original or amended version of the concession it is essential to establish all of the relevant facts and in particular to ensure that the capital sum derives from a right of action. If the capital sum was derived from any other type of asset, for example a statutory right or a contractual right, the concessionary treatment of ESC D33 will not apply. A legal action involving a breach of contract (whether or not in relation to a personal or private matter) will not be within the terms of the concession if the capital sum was derived from a contractual right or from an asset that was the subject of the contract, see CG13000.