Revenue Note for Guidance

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Revenue Note for Guidance

536 Capital sums: receipt of compensation and insurance moneys not treated as a disposal in certain cases

Summary

Under section 535 capital sums derived from an asset may be treated as giving rise to a disposal of the asset. Section 536 allows deferment of the charge on the receipt of compensation or insurance money for damage to or destruction of assets, or of sums for the forfeiture or surrender of rights or for the use or exploitation of assets, if the money received is used in restoring or replacing the asset. The amount received is treated as reducing the cost of the asset (or, in the case of the loss or destruction of the asset, the cost of replacing it), and the charge on the compensation money is not imposed until the asset or the asset replacing it has been disposed of. The relief must be claimed – it does not apply automatically.

Details

There are three separate aspects to the relief.

Asset not wholly lost or destroyed

(1)(a) A person may claim that the receipt of a capital sum as compensation or insurance for damage to assets which are not lost or destroyed is not to be a disposal of that asset in whole or in part. Instead of a charge to capital gains tax being imposed at the time of receipt of the compensation or other sum, the amount received is treated as reducing the cost of the asset so that when the asset comes to be disposed of only the cost as so reduced will be deductible from the consideration in computing any capital gain. To qualify for the relief the amount received must —

  • be applied wholly in restoring the asset, or
  • be so applied except for a part which is not required for that purpose and which is small as compared with the whole amount.

(1)(b) In the latter situation, in order to prevent the possibility of the amount allowable on the disposal of an asset becoming a negative or a minus quantity, the relief does not apply if immediately before the receipt of the capital sum there is no remaining allowable expenditure or the amount of the capital sum exceeds any such expenditure. In these circumstances the normal charge to capital gains tax applies.

Compensation for loss or destruction of asset entirely reinvested

(2) Where an asset is lost or destroyed and any capital sum received in compensation or under an insurance policy is used in replacing the asset, the owner may claim to be treated as if —

  • no gain or loss had accrued on the disposal of the old asset, and
  • the cost of the new asset were reduced by any notional gain.

The notional gain is the sum of the compensation money and any scrap value of the asset reduced by the cost price of the asset. The capital sum must be used to replace the asset within 1 year of the receipt of that sum or within such longer period as the inspector may allow.

Compensation for loss or destruction of asset partly reinvested

(3) A claim for relief under subsection (2) cannot be made if part only of the compensation money is used in replacing the asset. If, however, the part withheld is less than the gain (even if this is not all chargeable), the owner may claim that —

  • the gain be reduced to the amount of the part withheld (or a proportion of it where the gain is not all chargeable), and
  • the cost of the new asset be reduced by the amount of the reduction in the chargeable gain.

Example

(A)

Compensation received

100,000

Gain

20,000

Reinvested

90,000

Amount of compensation withheld

10,000

(less than gain 20,000)

Reduce gain chargeable to

10,000

Reduce cost of new asset by

10,000

(from 90,000 to 80,000)

(B)

If amount reinvested is only

70,000

Amount of compensation withheld

30,000

(greater than gain 20,000)

Charge gain in full

20,000

No adjustment in cost of new asset

70,000

(4) The relief does not apply to wasting assets (defined in section 560).

Relevant Date: Finance Act 2020