Claim for relief for damaged asset

Capital gains tax may be payable if you receive compensation for damage caused to one of your assets. However, if you use the amount received to repair or restore the asset, you can defer the tax.

Damage

When an asset is damaged or destroyed it may count as a disposal (sale), or part-disposal, for capital gains tax (CGT) purposes. This applies only to assets chargeable to CGT. So, for example, it won’t usually apply to machinery such as a car.

Compensation paid in respect of a damaged asset is treated in the same way as proceeds from selling all or part of it. If the proceeds exceed what you paid for the asset there is a capital gain on which tax might be payable. However, if you use the compensation money to repair or restore the asset, you can claim relief from CGT.

Where you make a claim for relief,  instead of the compensation being treated as proceeds from a disposal, it’s instead deducted from the cost, so that when you dispose of the asset it increases the gain. That is, the relief works similarly to CGT rollover relief.

A similar relief is available where an asset is completely destroyed and the compensation is used to purchase a replacement. There are different rules for buildings and other assets.

To qualify for the relief, you must use all of the compensation to restore the asset, or all of it other than a part which is “small” in comparison with the total sum. Relief is also available if the receipt itself is small relative to the value of the asset, for example where only minor damage was sustained.

Claiming

You can claim on your tax return, or in writing, for example where you do not complete a return or want to claim for a year that has already been submitted.

Time limit

A claim for relief must be made within four years of the end of the tax year in which the compensation was received.