Insurance proceeds received for a damaged/lost/destroyed asset. 5 / 5

Damaged/lost/destroyed chargeable asset

When a chargeable asset is destroyed/lost/damaged and the value of the asset has become negligible (very small value), then a person can make a negligible value claim. 

The asset will be treated as though it has been disposed of at it’s current, negligible value, therefore the person can realise a capital loss. The asset does not actually have to be disposed of, it is just a way of realising a loss.  When the asset is sold in the future, the negligible value will be used as its cost.

Illustration:

A painting was acquired for £10,000 and damaged in a fire. 

It now is worth a negligible amount. 

How will it be treated for capital gains tax?

Solution:

Disposal proceeds £ Nil 

Acquisition cost (£10,000)

Capital loss  (£10,000)

  • This capital loss will be relieved against current year capital gains, and if it cannot be relieved fully, it will be carried forward to be relieved against future capital gains.

  • Note the painting could be valued at any amount and this same treatment would apply.

    For example, if the painting was valued at £100,000 at the time it was damaged, then the capital loss realised would be:

    Disposal proceeds £ Nil 

    Acquisition cost (£100,000)

    Capital loss  (£100,000)

Insurance proceeds received for damaged/lost/destroyed chargeable asset

You have to pay CGT on the insurance proceeds.

The disposal proceeds are the amount of money received from the insurance company. 

Capital gains calculation:

Proceeds received from insurance company   X
Cost of asset lost/destroyed                           (X)
Chargeable gain                                                 X

The disposal is treated as though it occurred in the tax year that the insurance proceeds are received.

Illustration:

Holly owned a vase which was destroyed on 06/04/2024, she had paid £28,000 for it on 01/05/2011. 

The market value when it was destroyed was £80,000 however she only received £68,000 of insurance proceeds. 

What will the capital gains treatment be if she does not decide to reinvest the proceeds?

Solution:

For the tax year 24/25

  • Insurance proceeds £68,000

    Acquisition cost  (£28,000)

    Chargeable gain £40,000

    Annual exemption  (£3,000)

    Taxable gain £37,000

    Note the insurance proceeds received are £68,000, this will be used in the computation. 

    It does not matter that the market value at the time of disposal was £80,000 - the actual insurance proceeds received will be used.

Insurance Rollover Relief (IRR)

You get IRR if the insurance proceeds received are reinvested into another replacement asset within 12 months of the proceeds being received.

  • However, if only some of the proceeds are reinvested, then the proceeds which are not reinvested will be taxable immediately. 

    For example:
    Insurance proceeds received £1,000
    Asset costing £900 was destroyed
    Reinvestment in a new asset £950 

    The capital gain that resulted was £100 (£1,000 - £900)

    The £50 of insurance proceeds not reinvested (£1,000 - £950) will be taxable immediately. 

    The remaining £50 of capital gain will be deferred to be taxed at a later date.

    This is known as the gain rolled over

  • How is this £50 of capital gain deferred to be taxed at a later date?

    It is deducted from the cost of the replacement asset. 

    £950 - £50 = £900

    This £900 is known as the base cost of the replacement asset. 

    This base cost will be used as the cost of the replacement asset when it is disposed.

Illustration:

What if Holly used the insurance proceeds to buy a replacement vase for £59,000 on 01/03/2025? 

What capital gain will be realisable in this case?

Solution:

Proceeds received£68,000
Acquisition cost  (£28,000)
Chargeable gain   £40,000
IRR (40,000 - 9,000) balancing figure  £31,000
Capital gain realisable now (w1)£9,000

Working 1:

Proceeds received£68,000
Proceeds reinvested within 12 months of receipt(£59,000)
Capital gain realisable now (w1) (proceeds not reinvested)£9,000

Base cost of replacement vase:

Cost to acquire the new vase – Capital gain rolled over = Base cost of replacement vase

Capital gain rolled over:

Total capital gain £40,000
Gain realised immediately (£9,000)
Capital gain rolled over £31,000

Cost of new vase£59,000
IRR (£31,000)
Base cost of vase£28,000

What if Holly disposes of the new vase after 10 years for £100,000?

Proceeds received £100,000

Base cost  (£28,000)

Chargeable gain £72,000

Annual exemption (£3,000)

Taxable gain £69,000

Insurance proceeds used in restoration

If an individual receives insurance due to the damage of an asset and spends the insurance proceeds on restoring the asset plus an additional amount, the base cost of the asset will be treated as:

  • Cost                                                 £X
    (Insurance proceeds received)     (£X)
    + Additional amount spent            £X
    Base Cost                                        £X

Illustration

On 15/01/2025, a timepiece owned by Kamal fell and was badly damaged. 

The timepiece had been purchased for £99,000. Kamal received insurance proceeds of £54,000 and he additionally spent a total of £45,000 on restoring the timepiece to working condition again. 

What is the base cost of the timepiece after restoring it?

  • Solution

    Cost £99,000
    Proceeds (£54,000)
    Additional spent £45,000
    Base cost £90,000