Insurance, compensation and Capital Gains Tax

You may be treated as making a disposal or part-disposal of that asset, for Capital Gains Tax (CGT) purposes, if you’ve received money under an insurance policy or as compensation when an asset is lost, damaged or destroyed. This treatment does not apply to assets that are exempt for CGT purposes (e.g. cars).

If an asset is damaged, but not completely destroyed, the general rule is that you’re treated as having partially disposed of the asset and a charge to CGT may arise when you receive compensation. There are some exceptions to this general rule, such as when you use all the money to repair the asset or where the money received is regarded as small.

If the asset is completely lost or destroyed, you’ll generally be liable to CGT on the difference between the money received and the acquisition cost of the asset, although other scenarios are possible.

If you receive no or less than full compensation, you may realise a capital loss, which is then available for offset against other capital gains. 

If you buy an asset to replace the one that is lost or destroyed, you may be able to defer any CGT arising on the asset by treating the original asset as sold on a no gain/no loss basis.

There can be cases where there’s no underlying asset because the right to compensation is not connected with a claim for loss, damage or destruction, but for something non-proprietary, such as bad advice. Currently, the exempt amount of compensation is restricted to £500,000, although in some cases of goods or services supplied in the course of a trade, profession or vocation, HMRC may agree to lift the restriction. This is not always clear so it’s important for you to seek professional advice in such cases.