Damages

What types of gains are exempt?

 The following gains are exempt:

(a) Compensation for damages or personal injury.

(b) Magdalen laundry payments.

When is insurance compensation not treated as a disposal?

(1) Compensation proceeds are not treated as a disposal if the entire proceeds are used to restore the asset.

Instead, for the purposes of subsequent disposals, the base cost (acquisition cost including enhancement expenditure) of the asset is reduced by the compensation proceeds.

Relief is also given if most of the compensation proceeds are used to restore the asset, i.e., where a “small” part of the proceeds, not needed for the restoration, are not reinvested.

This latter relief (95% reinvestment: see below) does not apply where the asset had no pre-compensation cost, or if the compensation proceeds exceed its pre-compensation cost.

In practice, “small” means not exceeding 5% of the capital sum.

Where the compensation is received in respect of damage to an asset which is part of a larger unit, the test of smallness in relation to the value of the asset should be applied to the smallest unit which could reasonably be sold as such. For example, if a cottage is damaged, the unit is the cottage and not the estate on which it stands (Inspector Manual 19.1.7).

Example

Price you paid for the asset 40,000
Compensation received for flood damage 15,000
Amount of compensation re-invested in apartment 15,000

Since the entire compensation is re-invested, relief is given and the asset has a new base cost of €40,000 – €15,000.

Example

Price you paid for the asset 13,000
Compensation received for flood damage 15,000
Amount of compensation re-invested in apartment 14,500

Since 96.66% of the compensation is re-invested, relief should be due.

However, as the compensation proceeds (€14,500) exceed the asset’s pre-compensation cost (€13,000), no relief is given. The €15,000 is treated as a part disposal, and the asset retains its base cost of €13,000, together with €14,500 enhancement expenditure.

What is the time limit for reinvestment?

(2) Compensation proceeds re-invested within one year of the disposal in a replacement asset are treated as disposal proceeds giving rise to no gain/no loss. This relief must be claimed. The one year period may be extended by the inspector.

The base cost of the new asset is reduced by the excess of the compensation proceeds (plus the asset’s residual scrap value) over the disposal proceeds that would produce no gain/no loss.

Where the delay can reasonably be regarded as unavoidable, the “replacement period” may be extended to two years. The word “replacement” should be interpreted reasonably. If the new asset is of a similar functional type to the old asset, a claim may be admitted (Inspector Manual 19.1.7).

Strictly, no relief is due in law where a building has been destroyed, as the building and the land on which it stands are one asset. However, in practice, the old and the new buildings may be treated as distinct assets separate from the land on which they stand and relief may be allowed. This practice does not apply to a leasehold interest with less than 50 years to run (Revenue Precedent G130, 28 April 1997).

Example

Cost of rented house (June 2001) 80,000
Enhancement expenditure (July 2001) 30,000
Fire insurance compensation proceeds (May 2009) 200,000
Entire proceeds reinvested in building apartments in same place 250,000
Excess of the compensation proceeds (€200,000)
over proceeds that would produce no gain/no loss (€110,000) 90,000

The base cost of the new asset, €250,000, is reduced by this €90,000 excess to give a future net allowable cost of €150,000 for the new asset.

Is relief given when part of the compensation is reinvested?

(3) If only part of the compensation proceeds is reinvested in a new asset, no relief is given.

If, however, the part not reinvested is less than the gain, the gain is reduced (on due claim) to the amount not reinvested, and the new asset’s base cost is reduced by the same amount.

Example

Taking the facts of the previous example, assume that €150,000 (i.e., 75% of the compensation proceeds,) was spent replacing the old asset.

Your gain is:

Proceeds (2010) 200,000
Cost (2001) 110,000
Indexed at 1.309 119,570
Gain 80,430

The gain is reduced to the amount not re-invested (€200,000 – €150,000 = €50,000), and CGT is payable on this gain.

The €250,000 base cost of the new asset is reduced by the balance of the gain (€80,430 – €50,000 = €30,430,) giving rise to a future net allowable cost of €219,570 for the new asset.

Does compensation relief apply to wasting assets?

(4) This relief does not apply to wasting assets (section 560).