Compensation: assets damaged/destroyed: introduction
TCGA92/S23, TCGA92/S23 (1), TCGA92/S23 (4) & TCGA92/S23 (6)
Capital Gains Tax is charged on the disposal of assets. This is extended by TCGA92/S22 which treats capital sums derived from an asset as a disposal of that asset, see CG12940+. This includes capital sums received as compensation for damage to an asset, or for the loss or destruction of an asset.
In certain circumstances TCGA92/S23 relieves any charge to Capital Gains Tax where such compensation is received and is applied in restoring or replacing the asset damaged, lost or destroyed. Relief is available where
- an asset has been damaged, without being destroyed, and the compensation is applied in restoring the asset, see below
- an asset has been lost or destroyed and the compensation is applied in replacing the asset, see CG15740+
- a building has been destroyed or irreparably damaged and the compensation is applied in acquiring a replacement on other land, see CG15742.
Asset not lost or destroyed
Where an asset has not been lost or destroyed, but the owner receives compensation for the damage to the asset, then that will be treated as a capital sum derived from the asset, TCGA92/S22 (1), see CG12945 and CG12948.
Where the compensation is used to restore the asset, however, the recipient may claim under TCGA92/S23 (1)
To come within Section 23(1), the following conditions must be met:
- the receipt must fall within Section 22(1)(a)-(d) and
- for capital sums received before 6 April 1996 the asset must NOT be a wasting asset, see CG15725
- the asset must not be a wasting asset, see CG76700+ and
- the asset must NOT have been lost or destroyed and
- one of the following conditions must be met
- the capital sum must be wholly applied in restoring the asset
- all the capital sum must be so applied except for a part which is not reasonably required for that purpose and which is `small’ in comparison with the total capital sum
- the capital sum itself must be `small’ in comparison with the value of the asset.
Restored Assets: reduction of expenditure
Instead of being treated as a disposal, the capital sum is deducted from any allowable expenditure when you are computing the gain on a subsequent disposal of the asset.
See, however, CG12820 in cases where there have been a number of claims in respect of the same asset. See also CG15725 where the asset is a wasting asset.