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HMRC internal manual

Capital Gains Manual

Compensation: displaced tenants: general

Displaced Tenants

Compensation is often received by displaced tenants. Usually such compensation will only be received if the tenant is compelled to leave the land in question, either because the period of the tenancy has come to an end or because the landlord has issued a notice to quit. The main ways in which the compensation may arise are as follows:

  • Under the terms of the tenancy agreement itself (this is relatively rare).
  • Under some statutory provision.
  • Where the landlord and tenant agree that the tenancy should end in return for compensation being paid to the tenant.
  • Under a code of practice within a particular industry (for example in the brewing industry).

The taxation treatment of the compensation will depend mainly on which of the above circumstances applies.

 

Types of tenancies

There are three main types of tenancies whose termination often gives rise to compensation payments. Each of these types of tenancies is covered in detail in the instructions which follow:

  • Business tenancies, see CG72328
  • Agricultural tenancies, see CG72380
  • Tenancies of licensed premises, see CG72450

 

Is the compensation chargeable to Capital Gains?

In deciding whether compensation is chargeable to Capital Gains Tax (CGT) or Corporation Tax on Chargeable Gains (CTCG), it is first necessary to determine whether it is chargeable to Income Tax (or Corporation Tax on income), see BIM40100 onwards. If it is, then, as always, the Income Tax (or Corporation Tax) charge takes priority.

If the compensation is not chargeable to Income Tax (or Corporation Tax on income), it will be chargeable as a Capital Gain provided that it arises from the disposal of an asset. If the tenancy agreement itself provides for the payment of compensation on the termination of the tenancy, then the compensation will derive from the tenancy and will be chargeable as a Capital Gains. However, there are circumstances in which the compensation does not arise from the disposal of an asset and is therefore exempt from Capital Gains.

 

Statutory compensation

The customer may contend that the compensation received is exempt from Capital Gains. It will usually be contended that the exemption arises because the receipt is ‘statutory compensation’. Such compensation was considered in the cases of Davis v Powell, 51TC492, see CG72380, and Drummond v Brown, 58TC67, see CG72328, and in both cases it was decided that the compensation was exempt from CGT.

In any case in which it is claimed that compensation received on the loss of a tenancy is exempt from Capital Gains because it is ‘statutory compensation’, or indeed is exempt on any other grounds, it is essential that the precise terms on which the tenancy was surrendered are established before accepting the claim.

Further details are given in the instructions on business tenancies, see CG72328, and agricultural tenancies, see CG72380.

The tenancy agreement itself should also be examined to determine whether it provides for compensation to be paid on termination; if so, the compensation will be chargeable to Capital Gains Tax.

The taxpayer may also contend that the compensation is exempt because there was no legal right to compensation, either under the terms of the tenancy agreement or under any other statutory provision. Such compensation is often referred to as ‘ex gratia’. It is often paid to displaced tenants of licensed premises, see CG72450, but again the precise terms on which the tenancy was surrendered, and the terms of the tenancy agreement, need to be established before accepting that such compensation is exempt from Capital Gains.