06 November 2015

Extra Statutory Concession D33 provides for an exemption from capital gains tax for compensation payments.

In January 2014, ESC D33 was amended to cap the automatic exemption at £500,000 for payments where there is no underlying assets. A claim has to be made in writing to HMRC for the exemption to apply to amounts in excess of the cap.

In July 2014 HMRC published a consultation proposing to legislate for ESC D33 and raise the cap to £1million. The response to the consultation was published yesterday, 5th November 2015.

Respondents disagreed unanimously with the concept of the cap on the basis it is unfair since compensation payments are intended to put the recipient in the same position as they would have been without the loss for which compensation is being paid. Respondents to the consultation believe that it is wrong to tax damages in any amount. HMRC contend that this is not always the case as some element of compensation can, in certain circumstances, be designed to replace lost profits.

However, given the response to the consultation, HMRC have decided that rather than go ahead and legislate they will undertake further discussions to fully understand the issues in question. Meanwhile the £500,000 cap on the automatic exemption from capital gains tax still stands and it is important that claimants and their advisers do not forget this.

For further information, please contact Caroline Harwood.

Key contact

Alice Honeywill

Alice Honeywill Partner

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