Receiving an insurance payout after a property is damaged or destroyed can create a Capital Gains Tax liability, even though no sale has taken place. Understanding when CGT applies — and when a reinstatement election can defer it — helps you make informed decisions about how to use the insurance money.
Insurance payouts are treated as proceeds of a disposal
Under section 22 of the Taxation of Chargeable Gains Act 1992, a capital sum derived from an asset is treated as a disposal. An insurance payout following damage to or destruction of a property is a capital sum received in connection with the property asset.
The amount treated as proceeds depends on what happened:
- Total loss (property destroyed): The full insurance payout is treated as proceeds of a disposal of the property. The CGT gain is the payout minus the base cost (original purchase price plus costs).
- Partial loss (damage repaired): If the payout is small relative to the property's overall value (less than 5% of market value), it may be possible to deduct it from the base cost rather than treat it as proceeds. This is the small capital sum rule.
The reinstatement election
If a property is damaged or destroyed and you use the insurance money to reinstate it (or a replacement asset), you can elect under section 23 TCGA 1992 to treat the reinstatement cost as reducing the proceeds. This effectively defers any gain by reducing the base cost of the reinstated property.
The election must be made within four years of the end of the tax year of the event. It is only available if you actually use the money to restore or replace the property. If you pocket the insurance money and do not reinstate, the election is not available.
How the reinstatement election works
Example: You own a buy-to-let with a base cost of £150,000. A fire destroys it. The insurance payout is £280,000. You spend £220,000 rebuilding it.
Without the election: the £280,000 is treated as proceeds. Gain = £280,000 minus £150,000 = £130,000 chargeable gain. CGT due now.
With the reinstatement election: the gain is reduced by the £220,000 reinstatement cost. Effectively, the base cost of the rebuilt property is reduced. The gain is deferred until you eventually sell the reinstated property.
The election is particularly valuable where:
- You want to continue owning the property and do not want a tax bill arising from an insurance event
- The gain would otherwise be large
- The property is not your main home (PRR would cover a main-home gain in any event)
When reinstatement is not complete
If the insurance payout is larger than the reinstatement cost (for example, the property was worth more than it cost to rebuild), the difference remains as chargeable proceeds. Only the portion matching reinstatement expenditure benefits from the deferral.
The main home and PRR
If the destroyed property was your main home and is fully covered by PRR, any gain on the insurance payout is covered by relief. A reinstatement election is unnecessary in this case. PRR wipes out the gain.
If PRR only partially covers the gain (because the property was also let at some point), the reinstatement election can defer the partially taxable element.
Does the 60-day return apply?
If a property is treated as disposed of (through the insurance payout) and there is a chargeable gain on UK residential property, the 60-day CGT return obligation may apply. The disposal event is not the fire or flood itself but the receipt of the insurance money — HMRC's practice is that the capital sum is received when it is paid.
The reinstatement election can reduce or eliminate the gain, but if a gain remains, the 60-day return may be needed.
Practical steps
After an insured loss on a property:
- Establish the full insurance payout amount
- Determine whether you intend to reinstate the property or not
- If reinstating, track the reinstatement costs carefully
- Consider whether the reinstatement election is beneficial
- Assess whether a 60-day CGT return obligation arises
These situations involve significant complexity. Start your return at LetsFile if you have received an insurance payout on a property and need to assess the CGT position — a Chartered Accountant/Chartered Tax Advisor reviews the specific facts and advises on whether the reinstatement election is available and appropriate.