It is not widely known that the receipt of money under an insurance policy or as compensation when an asset is lost, damaged or destroyed may be treated for Capital Gains Tax (“CGT”) purposes as a disposal or part-disposal of that asset. 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 the taxpayer is treated as having partially disposed of the asset and a charge to CGT may arise on receipt of the compensation. There are some exceptions to this general rule where the money received is fully used to repair the asset or where the money received is regarded as small.
If however the asset is completely lost or destroyed, CGT may arise on the difference between money received and the acquisition cost of the asset, however other scenarios are possible.
- A taxpayer who has received no or less than full compensation may realise a capital loss, which is then available for offset against other capital gains.
- A taxpayer who buys an asset to replace the one that is lost or destroyed 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 is no underlying asset because the right to compensation is not connected with a claim for loss, damage or destruction. It used to be the case that compensation in such cases was exempt. Since January 2014 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.