Tax Tip
02 Mar 2010
Property Repairs
By Anne Rooney, Director, FPM Chartered Accountants
Question
I own several investment properties. During the recent cold spell I had a burst pipe in one of the properties which resulted in significant damage and flooding. As the property was insured I am now waiting for the insurance payment before making the necessary repairs. Do I need to report this income on my tax return?
Answer
The receipt of compensation because a property has been damaged or destroyed is a capital sum deemed to have been derived from the property itself. Therefore, it is a receipt for capital gains tax purposes and not for income tax purposes.
Depending on how you use the compensation, the receipt of this income will be treated as either a capital gains tax disposal in the tax year of receipt, or subtracted from the cost of any allowable expenditure on the property for the calculation of any gain on a future sale of the property.
If at least 95% of the insurance proceeds received are used to restore or replace the property (if the property has been totally destroyed) then no capital gains tax liability will arise at the date of receipt of the compensation and no disclosure is therefore required on your tax return. If, however, less than 95% of the proceeds are used in restoration or replacement, then a capital gains liability may arise and professional advice should be sought to determine how and whether this should be disclosed on your tax return.
The advice in this column is specific to the facts surrounding the questions posed. Neither FPM Accountants LLP nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
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