Damages paid for loss of income are taxable but, by concession, most damages paid as a capital sum for not taking court action have been exempt from taxation to Capital Gains Tax (CGT). If the damages paid can be linked to a specific asset (for instance damages paid because of an event leading to the diminution in value of a property) the compensation is taxable to CGT as a gain arising on that asset.



However, where the compensation cannot be attributed to a specific chargeable asset, it had previously been exempt from CGT.



This concession has now been modified by HM Revenue and Customs (HMRC) and, from 27 January 2014, the following rules apply:

• Only the first £500,000 of this kind of capital compensation will be exempt;
• HMRC will not normally provide relief above that amount; but
• Anyone who does receive compensation of more than that amount who thinks it should not be chargeable to CGT can make a claim in writing to HMRC. There is no guarantee that a claim will be upheld, but HMRC will consider whether further relief can be given.

The new regime will not affect damages paid for personal injury.