Commentary

C2.504 Reinstatement of damaged assets

Capital gains tax
Capital gains tax | Commentary

C2.504 Reinstatement of damaged assets

Capital gains tax | Commentary

C2.504 Reinstatement of damaged assets

The taxpayer may claim relief in respect of compensation or insurance money for damage to assets in cases where the amount is applied in restoring the asset1. The capital sum received must be:

  1.  

    •     wholly applied in restoring the asset, or

  2.  

    •     applied in restoring the asset except for an amount:

    1.  

      –     which is not reasonably required for that purpose, and

    2.  

      –     which is small compared with the whole sum; in practice, HMRC regard 'small' as meaning 5% or less or any amount not more than £3,0002, or

  3.  

    •     small compared with the value of the asset, which in practice seems to mean the value immediately before the damage occurred3

For capital sums received after 5 April 1996, the relief applies in respect of all wasting assets, providing that the capital sum received is wholly applied in restoring the asset4.

If relief is claimed, the receipt of compensation is not treated as a disposal but the consideration that would have been taken into account in computing any chargeable gain is deducted from the allowable expenditure. Where a claim is allowed in respect of a wasting asset, the deduction in respect of the capital sums received is made from the wasted cost of the asset5 rather than from its original cost, in order to ensure that relief is not given for capital sums exceeding the allowable expenditure6. The indexation allowance (where relevant7) in respect of a subsequent disposal is computed on the whole

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