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HMRC internal manual

Capital Gains Manual

Compensation: Mis-sold pensions

Someone who has received misleading or inappropriate financial advice may have a right of action against the person who gave that advice. If they subsequently receive compensation, this may be chargeable to Capital Gains Tax as a capital sum derived from an asset, TCGA92/S22 (1). In certain circumstances, the compensation may be exempt under ESC/D33, see CG13020, where there is no underlying asset.

For Capital Gains Tax purposes, the term ‘assets’ includes incorporeal rights such as membership of a pension scheme, TCGA92/S21 (1), see CG12000+. If, therefore, someone had been given misleading financial advice in connection with their membership of such a scheme, any compensation they subsequently receive may have derived from an asset and be chargeable to Capital Gains Tax.

In October 1994, the Securities and Investments Board (SIB) recommended that financial advisers review all cases where, on the basis of advice given between 29 April 1988 and 30 June 1994 inclusive, individuals had transferred from, opted out of or failed to join an occupational pension scheme and had instead taken out a personal pension scheme, buy-out contract or retirement annuity contract. The purpose of the review was to identify any cases where the customer had been disadvantaged by taking this action. Compensation was then to be paid to employees, pensioners or their beneficiaries who were identified as victims of bad investment advice during the relevant period.