From 27 January 2014, to claim relief under ESC D33 from Capital Gains Tax on compensation payments of more than £500,000 which arise from a right to take court action it will be necessary to make a claim.

The concession deals with compensation and damages paid because of a right to take court action. Where the compensation paid is a capital sum rather than income it is potentially taxable to CGT or for a company, a gain resulting from a capital sum will potentially be taxable to Corporation Tax (CT).

If the compensation can be linked to an asset which is chargeable to CGT/CT, the compensation is taxed as a capital gain on that asset. This does not represent a change. For example, compensation paid by an estate agent because his negligence led to the sale of a building falling through is treated as if it is a capital gain on the building.

Where the compensation can’t be linked to an asset chargeable to CGT, the concession treats the full amount of any compensation as automatically exempt from CGT. This changed from 27 January 2014:

• only the first £500,000 of this kind of capital compensation will be exempt;
• HMRC will not normally provide relief above that amount, but;
• anyone who receives compensation of more than that amount and thinks it should not be chargeable to CGT can make a claim in writing to HMRC.

There is no guarantee that a claim will be upheld but HMRC will consider whether further relief can be given.

More information is available on the HMRC website.