If an asset is just damaged and not destroyed this is treated as a part disposal. The formula to calculate the allowable cost is:
A/(A+B) x original cost, (where a is the compensation received and B is the value of the remaining asset)
Restoration of the asset – having received compensation from the insurance company, the taxpayer would use all or part of that money in restoring the asset. If the capital sum is spent restoring the asset, this is treated as enhancement expenditure for CGT purposes.
Claims to avoid this part disposal – the compensation received can not be treated as a part disposal if one of the three conditions are satisfied:
• All of the compensation received is used to restore or enhance the asset
• The amount retained is small, this is less than £3,000 or less than 5% of the compensation received
• The capital received it small, less than £3,000 or less than 5% of the value of the asset
When this applies, the compensation received will be deducted from the base cost of the original asset.