Taxation of Insurance Proceeds – Help Snow Tax Brakes!
Like most men I think I could give Lewis Hamilton a run for his money in the driving stakes. So I would imagine that Lewis would also have crashed (sounds dramatic doesn’t it) in to a road sign if faced with the same bad weather conditions.
Imagine the scene. An Arctic wind had blown a blizzard into Saffron Walden, visibility was down to two feet and a small child with an injured puppy was standing in the middle of the road. I took the only action I could and performed a controlled hand brake turn. But due to the black ice covering the road I had to take evasive action and used a sign to bring the car to a halt just in time. The children in the stranded school bus in front of me clapped my heroic actions.*
*For the purposes of the insurance assessor please review the claim form for the abridged version.
This slight prang has left my car looking very sorry for itself. Crumple zones on modern vehicles are fantastic for pedestrians and have saved many a life but…… why does my bumper have to be made out of paper mache and stuck together with blancmange. The results of a very low speed impact into a small road sign have left my car looking like it hit a tank and a £3,000 garage bill.
But the accident wasn’t the worst thing. After a completely accident free driving history I had to ask Mrs TTF where my insurance documents were. Once she had found out I was ok the “I told you so” look spread across her face as she had advised me not to drive in the snow. Obviously I had ignored this advice and obviously she was right. See previous blog posts where she has also been right. There has been some small ribbing so far but I can imagine that this will increase in time and of course be wheeled out when I want to perform any driving maneuver that she is against.
As everyone ,even my “friends” who smirked, (you know who you are!) have said at least no one was hurt. I now have the headache of dealing with the garage and insurance company.
But what would be the tax effect if an asset is lost or destroyed and insurance proceeds were received?
The Tax Bit
Are insurance proceeds taxable? As with everything in tax the answer is it depends.
The basic rule in respect of insurance receipts is that the proceeds are attached to the underlying asset e.g. On the destruction of a rental property the insurance proceeds would be taxable as a capital gains disposal on the owner.
Fear not though, if the proceeds are fully used to purchase a replacement asset within one year then the gain is relieved in full. If part of the proceeds are used then a part disposal will occur and only proportion of the gain is taxable.
Asset Used in Business
The following considers an asset which is used in the trade of its owner.
a) Capital Allowances
If an asset is lost or destroyed then it is effectively treated as being disposed of for capital allowance purposes. The proceeds are therefore used to reduce the relevant capital allowance pool. A balancing charge may arise if the pool is fully exhausted.
b) Capital Gains Tax
If, in the unlikely event, that the insurance proceeds are in excess of the original cost of the asset then a capital gain may arise depending on whether the asset were chargeable. In terms of a motor vehicle this would not be the case as motor vehicles are not chargeable to CGT. In any event if a chargeable gain arose relief would be available if it were reinvested in a replacement asset within one year.
I need to go now as an angry mob is outside demanding that I repair the sign at the bottom of our road!
By Peter Cross