Francesca Kaye & Mary Hodgson discuss the important changes to capital gains tax and compensation payments
In the case of Zim Properties Ltd v Proctor [1985] STC 90, 58 TC 371, the court decided that the right to take court action for compensation or damages is treated as an intangible asset for capital gains tax (CGT)/corporation tax purposes. This does not, however, apply to rights pursuant to statute or contract.
All references to CGT in this article apply equally to corporation tax.
According to the decision in Zim, anyone receiving compensation or damages, whether pursuant to a court order or negotiated settlement is treated as disposing of that asset (the right to sue) and the sum received is the gain which attracts CGT.
The right to sue is treated as having no acquisition cost as there will not have been any expenditure involved in acquiring that right, and the entire amount of the compensation will therefore be taxable.
Extra statutory concession D33—Pre-January 2014
To counteract the effect of Zim, HMRC introduced extra statutory concession D33 (D33) in December
