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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Compensation: compensation for deprivation of foreign assets: introduction

On certain occasions, normally because of war or revolution, assets located overseas have been appropriated or confiscated by a foreign Government.

In some cases compensation has been paid or the confiscated assets have been returned to the original owners, their descendants or the beneficiaries of their wills, at a later time.

We consider that this type of compensation is chargeable to Capital Gains Tax or to Corporation Tax on chargeable gains under TCGA92/S22 (1) as a capital sum, being money or money’s worth, which is derived from an asset, see CG12940+. The asset from which the compensation derives can be identified as the recipient’s statutory right to compensation arising either from an agreement between the governments of the UK and the foreign country or from legislation enacted by the foreign government. This is based on the judgement in Davenport v Chilver, 57TC661, see CG12020.

Davenport v Chilver

Miss Chilver claimed compensation in her own right and as a beneficiary of her mother’s estate under the Foreign Compensation (USSR) Order 1969 in respect of property in Latvia owned by herself and her mother which had been confiscated when Latvia became part of the Soviet Union in 1940. The Court held that the compensation for Miss Chilver’s personal property was derived from the confiscated asset itself but that the compensation she received as a beneficiary of her late mother’s estate was derived from her statutory right to claim under the 1969 Order.

We now take the view 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 statutory right to make a claim even if that person was the owner of the asset. Guidance on statutory rights as assets for CG purposes is given at CG12020.

Time of disposal

The time of disposal in respect of a gain accruing on compensation for the deprivation of foreign assets is the time when the capital sum is received, TCGA92/S22 (2), unless the gain is not chargeable to CGT or to CT on chargeable gains, see below.

Computation of gain

For the purposes of computing a gain or loss accruing on the receipt of a capital sum the consideration is the value of the compensation received in money or money’s worth. Where the claim is satisfied by the transfer of an asset the consideration is the value at which the asset is treated as having been acquired for the purposes of computing a gain or loss on its subsequent disposal.

TCGA92/S17 (1)(a) will not apply to treat the acquisition costs as an amount equal to the market value of the right to compensation where -

  • it was acquired on or after 10 March 1981 by means of a bargain which was not at arm’s length and
  • there was no corresponding disposal and
  • no consideration in money or money’s worth was given for the acquisition or the consideration given was an amount or value lower than the market value of the right.

If the market value rule does not apply the acquisition costs will be the consideration given to acquire the right, if any.

Gains not chargeable to CGT or to CT on chargeable gains

In certain circumstances gains on compensation for deprivation of foreign assets are not chargeable to Capital Gains Tax or to Corporation Tax on chargeable gains.

Guidance on compensation received on or after 6 April 2010 (or, for compensation received by persons chargeable to CT, on or after 1 April 2010) is given at CG13060.

Guidance on compensation received before 6 April 2010 (or, for compensation received by persons chargeable to CT, before 1 April 2010) is given at CG13062.