An insurance payout or compensation received for damage to, or loss of, a chargeable asset is a disposal for capital gains tax under section 22 of the Taxation of Chargeable Gains Act 1992, even though nobody buys anything. Section 23 lets you claim to defer the gain if you spend the money restoring a damaged asset or replacing one that was lost or destroyed, or if the sum is small. Without a claim, the receipt is taxed as a disposal or part disposal in the tax year you receive it.

Which receipts does section 22 cover?

Section 22(1) says there is a disposal by the owner whenever a capital sum is derived from an asset, whether or not the payer acquires anything. It lists four common cases:

  1. (a) compensation for any kind of damage or injury to assets, or for their loss, destruction, dissipation or depreciation;
  2. (b) sums received under an insurance policy covering damage, injury, loss or depreciation of assets;
  3. (c) sums received for forfeiting or surrendering rights, or for refraining from exercising them;
  4. (d) sums received for the use or exploitation of assets, such as payments for an easement or wayleave.

Under section 22(2) the disposal happens when the capital sum is received, not when the damage occurred. A claim settled in a later tax year therefore falls into that later year. Each separate receipt is a separate disposal (CG12945).

Where the asset is totally lost or destroyed, section 24(1) would also treat that as a disposal. HMRC’s manual at CG12965 explains that section 22 takes precedence, so there is one disposal, with the insurance money as proceeds and the asset’s cost deducted.

Which payouts are outside capital gains tax altogether?

  • Revenue receipts. If the payment replaces trading income or stock, it is income, and any income charge takes precedence. An interest element in compensation is taxed as income (CG12971).
  • Personal injury. Section 51(2) declares that compensation or damages for any wrong or injury suffered by an individual in their person, profession or vocation are not chargeable gains.
  • Exempt assets. Private cars are not chargeable assets under section 263, so an insurance payout for a written off car has no capital gains consequence.
  • Compensation with no underlying asset. Where a sum derives only from a right of action, such as compensation for poor financial advice, Extra Statutory Concession D33 exempts the first £500,000 of gain from each set of legal proceedings for sums received from 27 January 2014 (CG13020).

Reliefs that would apply on a sale of the asset also apply to the deemed disposal. CG12945 gives business asset rollover relief and private residence relief as examples, so insurance money for a fire at your only home is usually covered by private residence relief anyway.

What if the asset is damaged and you repair it?

Section 23(1) lets you claim that the receipt is not a disposal, provided the asset is not lost or destroyed, if one of these applies:

  • the whole capital sum is spent restoring the asset;
  • all of it is spent on restoration except a part not reasonably required that is small compared with the whole sum; or
  • the capital sum itself is small compared with the value of the asset.

HMRC treats small as 5% or less, and also accepts any sum of £3,000 or less (CG15703). For a building that is part of a larger property, the comparison uses the smallest unit that could reasonably be sold separately, such as a damaged cottage on an estate.

When the claim succeeds, the sum is deducted from the asset’s cost, and the restoration spending is added back as enhancement expenditure. In HMRC’s example, an asset costing £10,000 receives £4,000 and the whole £4,000 is spent on repairs, so the cost stays at £10,000.

Section 23(2) adds a limit: where the allowable cost is less than the sum received, the second and third options are not available. Instead you can elect to reduce the sum by the whole of the cost, leaving no cost for later.

If more than a small part is left unspent, section 23(3) still allows the part spent on restoration to come off cost. The unspent part is a part disposal, with A as the unspent amount and B as the value of the restored asset (CG15710).

What if the asset is lost or destroyed and you replace it?

Section 23(4) applies where an asset is lost or destroyed and the compensation or insurance money is spent on a replacement within one year of receipt, or a longer period HMRC allows. CG15740 says HMRC may extend to two years where the delay was unavoidable, but considers an extension only once the replacement has been bought and the claim made. If you claim:

  • the old asset is treated as disposed of for no gain and no loss; and
  • the cost of the replacement is reduced by the gain that would have arisen, worked out using the insurance money plus any scrap value of the old asset.

If only part of the money is reinvested, section 23(5) allows a partial claim provided the unspent amount is less than the gain. The gain taxed now is limited to the unspent amount, and the replacement’s cost is reduced by the rest.

A building is legally part of the plot it stands on, so its destruction is not the loss of an asset. Where it is rebuilt on the same site, section 23(1) can apply. Where a replacement building is put up or bought elsewhere, section 23(6) treats the old and new buildings as separate assets, so section 23(4) or (5) can apply, with a just and reasonable apportionment of cost (CG15742). The cost of acquiring the new plot is not counted as spending on the replacement building.

For wasting assets, section 23(8) removes the small sum options and modifies the cost deduction.

Worked example

Illustration only. Raj owns a valuable painting that cost £30,000. It is destroyed in a flood and in May 2026 his insurer pays £50,000. There is no scrap value.

  • Without a claim: gain of £50,000 less £30,000, which is £20,000, taxable in 2026 to 2027.
  • Full replacement: Raj buys a similar painting for £52,000 in January 2027 and claims under section 23(4). No gain arises now, and the new painting’s cost is £52,000 less £20,000, which is £32,000.
  • Partial replacement: if he spent only £46,000, the £4,000 not spent is less than the £20,000 gain, so section 23(5) applies. He is taxed on £4,000 now, and the replacement’s cost is £46,000 less £16,000, which is £30,000.

The deferred gain comes back into charge when the replacement is sold, because its cost is lower.

How and when do you claim?

There is no prescribed form. CG15700 says the claim must be in writing and identify the claimant and their reference, the asset, the amount received and how the conditions are met. The time limit is four years from the end of the tax year for individuals, or four years from the end of the accounting period for companies. If the claim is made before you file the return, the gain does not need to be included. If the return is filed first, the gain should be declared and the claim made afterwards, which may mean amending the return.

If you replace an asset after leaving the UK, a cost reduced by a section 23 claim can bring a later gain within the temporary non residence rules.

Common mistakes

  • Using the date of the fire or theft instead of the date the money was received.
  • Forgetting the cost adjustment, so the later sale overstates the base cost.
  • Treating theft as a disposal in its own right. HMRC’s manual says theft is not itself a disposal; the insurance receipt is (CG12700).
  • Claiming section 23(4) when part of the money was kept back. The partial claim under section 23(5) applies instead.
  • Assuming every insurance receipt is capital. A payment that is revenue in nature, such as one replacing lost trading receipts, is taxed as income first (CG12971).

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.