CGT on insurance payout?

CGT on insurance payout?

21:26 PM, 14th September 2022, About 2 weeks ago 10

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My wife and I had a rental flat flooded in July 2021. It immediately became uninhabitable and remained so for a year while negotiations with our insurers were ongoing.

These were eventually settled for a sum of approximately £60,000 (for refurb costs and not including loss of rent).

As I work in the construction trade, I managed to get the flat refurbished for a cost of £35k. So we have a ‘surplus’ of £25k.

A little knowledge is a dangerous thing, of course, but some online research suggests this surplus may be taxable as a capital gain.

I have seen a reference to HMRC manual entry TGA 1992 Section 23.

However, my accountant says that it is income, not capital gain.

Obviously, as my wife and I both have annual capital gains tax allowances, it would be very beneficial to us if it was in fact a capital gain and taxed accordingly.

Would be most grateful for any input on this situation please.

Thank you.

Karl



Comments

Seething Landlord

11:08 AM, 15th September 2022, About 2 weeks ago

I cannot say whether this is technically correct or not but it seems to me that the £60,000 would be accounted for as property income and actual expenditure on the repairs would be allowable as a revenue expense. It follows that the remaining £25,000 is still property income and would be taxed as such.

Olls63

11:51 AM, 15th September 2022, About 2 weeks ago

If the insurance premiums are an allowable reveune expense, then the receipts are subject to income tax. Normally they would be contra'd by the cost of the repair.
THe HMRC CGT manual states that income tax takes precedence over CGT.

OrangeGrouse View Profile

13:30 PM, 15th September 2022, About 2 weeks ago

Thank you for your comments. No doubt you’re probably right about it being income (rarely does the cookie crumble as we would like it to). However, I would like to know why there are specific references within the HMRC manual to this situation the surplus being taxed as a capital gain. Perhaps as you say income tax takes precedence over CGT.

Seething Landlord

15:00 PM, 15th September 2022, About 2 weeks ago

Reply to the comment left by OrangeGrouse at 15/09/2022 - 13:30
I have looked at the Act itself https://www.legislation.gov.uk/ukpga/1992/12/section/23
and tried to follow the links in the HMRC manual starting at
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12950

It appears that insurance money received as compensation for damage to property is or can be treated as capital as you suggest but there are so many twists and turns and choices/elections to make that for me it is now shrouded in mystery.

OrangeGrouse View Profile

16:16 PM, 15th September 2022, About 2 weeks ago

Reply to the comment left by Seething Landlord at 15/09/2022 - 15:00Yes, thank you. I had the same thoughts: it is far from straightforward to understand.
Slightly awkward situation with my accountant (who I’ve just signed up with after 19 years at a previous firm): he insists that it is income and not capital gain but has declined to comment on the link I sent him to this Act.
Are there accountancy firms out there who one can approach for specific advice such as this situation?
Thanks again

Smiffy

20:25 PM, 15th September 2022, About 2 weeks ago

Check out this:
BIM40755 - Specific receipts: insurance recoveries: capital recoveries

In short, insurance receipts are capital receipts to the extent they relate to fixed assets, i.e. a rental property. However, any amount received to cover trading losses, e.g. rents, are trading receipts, or to cover repairs to fixed assets are trading receipts. Any excess is a capital receipt.

See this for more detail on capital receipts from insurance:
TCGA 1992, s. 22 - a capital sum received in respect of damage or injury to the property is taxed on the basis that it is a capital sum derived from an asset.

OrangeGrouse View Profile

8:34 AM, 16th September 2022, About A week ago

Reply to the comment left by Smiffy at 15/09/2022 - 20:25
Thank you for your help. BIM40755 seems to be within the Corporation Tax Act so I wonder if this applies in our situation as the property is owned in our names rather than a company structure?

OrangeGrouse View Profile

11:44 AM, 16th September 2022, About A week ago

Well, just had a consultation with another accountancy firm who think it is actually a capital gain. I am waiting for confirmation in writing.

Sanjiv

21:47 PM, 19th September 2022, About 7 days ago

It may be worth looking at this from a couple of different angles with your accountants.

It is a large sum and I presume that whether you carry out the works or not would have an impact on the value of the property.

Say if you had purchased the property in the flood damaged state and then had to spend £35,000 to get it into the refurbished condition that it is in now, would your accountants class this as capital or revenue expense? If they say that the £35,000 is a capital expense, then why should the £60,000 not be a capital receipt?

What if you sold the property without doing the works. It doesn't make sense to pay income tax on the £60,000 and then make a capital loss on the sale of the property due to the damages.

These are just my immediate thoughts and what I would be asking accountants.

OrangeGrouse View Profile

10:47 AM, 20th September 2022, About 6 days ago

Thank you Sanjiv. Your spot on the money it seems. My accountant has since come back to me and agreed that it is a capital receipt so we are now looking at the ways to deal with this in the most tax effective manner.

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