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HMRC internal manual

Capital Gains Manual

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Compensation: part of capital sum not applied not `small'

If condition (b) in CG15700 is not satisfied because the part of the capital sum, seeCG12940+, which is not used to restore the asset, is not `small’, see CG15703, then thewhole of the capital sum would be treated as a disposal.

However, the recipient can claim to have the part of the capital sum which was applied inrestoring the asset, deducted from the acquisition cost of the asset, TCGA92/S23 (3).

The part of the capital sum which WAS NOT applied in restoring the asset is treated as apart-disposal, TCGA92/S22 (1), see CG12970.

An asset which cost £50,000 in April 1990 is damaged by fire. The owner receivescompensation of £20,000 in November 1993 and in the same month spends £15,000 onrestoring the asset. The value of the asset after restoration is £75,000. The ownerclaims under TCGA92/S23 (3). In June 1995 the asset is sold for £80,000.

The amount of compensation which was NOT spent on restoration is £5,000, which can beaccepted as not `small’, being more than 5 per cent of £20,000, see CG57836. This £5,000is therefore treated as the consideration for a part-disposal of the asset.

      £
       
Amount not used     5,000
Acquisition cost 50,000 x 5,000 = 3,125  
  5,000 + 75,000    
Restoration cost 15,000 x 5,000 = 938  
  5,000 + 75,000    
    4,063  
  (April 1990 - November 1993)    
Indexation allowance 3,125      
x 0.132 =   413 4,476
Chargeable gain     524

The £15,000 spent on restoring the asset is then deducted from the net cost in computingthe gain expenditure on the subsequent disposal of the asset.

SUBSEQUENT DISPOSAL COMPUTATION

| | | | £ | || | Disposal proceeds | | | 80,000 | | Acquisition cost
(50,000 - 3,125) | | 46,875 | | | Restoration cost
(15,000 938) | | 14,062 | | | | | 60,937 | | | less compensation
used to restore asset | | 15,000 | 45,937 | | | | | 34,063 | | Indexation
allowance | | | | | | (April 1990 - June
1995) | | | | | | | | | Acquisition cost | 46,875 x 0.197 = | 9,235 | | | | (November 1993 -
June 1995) | | | | Restoration cost | 14,062 x 0.058 = | 816 | | | | | 10,051 | | | less notional indexed
rise from date of
receipt | | | | | of compensation,
see CG15720 | | | | | | (November 1993 -
June 1995) | | | | CHARGEABLE
GAIN | 15,000 x 0.058 = | 870 | 9,181 | | | | | 24,882 |

If the owner of the asset carried on a trade, then the £15,000 spent on restoring theasset would not be allowed as a deduction for Schedule D Case I, ICTA88/S74 (1).