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HMRC Consults On Legislating ESC D33

Thursday 21st August 2014

HMRC has recently published a consultation document about introducing legislation to replace the long standing Extra Statutory Concession D33, which covers a number of circumstances where a capital sum is received from a right of action.

The concession was amended in January 2014 so that only the first £500,000 of a capital sum, where there is no underlying asset, was exempt from CGT for individuals and CT for companies, and exemptions for amounts in excess of this had to be made in writing to HMRC.

The consultation seeks views on introducing an absolute limit of £1m to the exemption with amounts in excess of this liable to CGT. HMRC also seeks views on legislating the relief given by ESC D33 for personal compensation, damages and indemnities.

ESC D33 was originally introduced following the High Court decision in Zim Properties Ltd v Proctor [58 TC 371].  The High Court held that the company’s right to sue the solicitors was the source of damages and was an asset for CGT purposes. By receiving the damages, the company had disposed of that asset.

This established that the right to take court action for compensation or damages is an asset in its own right for CGT purposes, but that it is not necessary to take court action and have compensation awarded under a court order. The person with the right of action may agree to accept compensation because of arbitration or a negoiated settlement. HMRC will still regard any capital sum received as a disposal of the right of action.

 As, in most cases, the person will not have incurred any expenditure in acquiring the right of action, the receipt of damages will give rise to a capital gain.

 The purpose of the concession was to remove the anomalies resulting from the decision in Zim Properties and avoid difficulties in quantifying settlements because of uncertainty of the tax treatment of damages.

The consultation opened on 31 July and runs until 15 September 2014.

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