taxation on insurance claim

physioman

Hi basically my cousin's chicken house was damaged during the storms this year. He put in for a claim and received a lump sum. My query is does he have to pay cgt on it or is there a way of reducing the deductible tax from the sum?

Geuze

CGT is paid if you make a gain when disposing of an asset.

No asset was sold or disposed of here, so CGT does not apply.

As insurance claims don't make you any better off, why would they be taxed?

It's not income, nor is it a capital gain.

dogsears

physioman wrote: »

Hi basically my cousin's chicken house was damaged during the storms this year. He put in for a claim and received a lump sum. My query is does he have to pay cgt on it or is there a way of reducing the deductible tax from the sum?

What Geuze says above is not quite correct. Insurance proceeds can be taxed, depending on what they cover, what the business is etc.

If your cousin uses the chicken house for a business, any element of the insurance payout that covers loss of profits could be taxed as trading income so he should check if there is any element of this.

As to CGT, there is unlikely to be a taxable gain but its not impossible. This is from the Revenue guide to CGT:

"The receipt of compensation or insurance money for damage to or destruction of assets, or of sums for the forfeiture or surrender of rights or for the use or exploitation of assets may, in certain circumstances, be treated as a disposal for CGT purposes. The resultant charge to tax may be deferred if the money received is used in restoring or replacing the asset. The amount received is treated as reducing the cost of the asset (or, in the case of the loss or destruction of the asset, the cost of replacing it), and the charge on the compensation money is not imposed until the asset or the asset replacing it has been disposed of. The relief must be claimed – it does not apply automatically."

Marcusm

Geuze wrote: »

CGT is paid if you make a gain when disposing of an asset.

No asset was sold or disposed of here, so CGT does not apply.

As insurance claims don't make you any better off, why would they be taxed?

It's not income, nor is it a capital gain.

The proceeds of an insurance claim will generally constitute a capital sum derived from an asset giving rise to a chargeable event for CGT purposes. THe base cost attributable to the deemed disposal is calculated using the common A/(A+B) where A is the value of the proceeds and B is the value of the remainder. Reliefs might be available if it was a business asset.

physioman

Thanks for the replies. Hard to get my head around it but I'll pass the info on to him. Are there specific farm/agricultural accountants

barneystinson

physioman wrote: »

Thanks for the replies. Hard to get my head around it but I'll pass the info on to him. Are there specific farm/agricultural accountants

Yeah, does he not have one already?

Not that this is something that requires an agri/farming specialist, it's fairly straightforward and as other posters have said its quite unlikely he'll owe any tax, unless part of the insurance payout was for loss of income (it's not very complicated that money you get to compensate you for income that would have been taxable, is treated the same as the income it replaces...)

Gard1

physioman wrote: »

Hi basically my cousin's chicken house was damaged during the storms this year. He put in for a claim and received a lump sum. My query is does he have to pay cgt on it or is there a way of reducing the deductible tax from the sum?

Your cousin received a lump sum from the insurance company to bring the chicken house back to the way it was prior to the storm.

Therefore, assuming he has repaired the shed the correct treatment (assuming no loss of income in the lump sum) is
He writes cheques to merchants suppliers etc for 3k for the repairs this is a debit on the accounts
He receives 3k from Insurance company this is credit and net effect is there isn't any gain or loss therefore no effect on the taxation.

That would be the simplest format ....

Marcusm

Gard1 wrote: »

Your cousin received a lump sum from the insurance company to bring the chicken house back to the way it was prior to the storm.

Therefore, assuming he has repaired the shed the correct treatment (assuming no loss of income in the lump sum) is
He writes cheques to merchants suppliers etc for 3k for the repairs this is a debit on the accounts
He receives 3k from Insurance company this is credit and net effect is there isn't any gain or loss therefore no effect on the taxation.

That would be the simplest format ....

That might be relevant in some alternate universe but will be completely irrelevant for Irish tax.