TQOTW: Compensation - The right to light & ESC D33
Mrs X, who is a UK resident individual, has received £100k compensation from a UK property development company. This payment was in relation to the ‘right to light’, under section 3 of the Prescription Act 1832. The property developer had erected a 20-storey tower block either side of my client’s residential property, resulting in the obstruction of natural light into her property. My client was awarded this through a court settlement to compensate for the loss in value of her property.

Is this compensation taxable on my client?

What is the right to light?

A “right to light” is a legal easement that gives a landowner the right to receive light through ‘defined apertures’ (usually windows) in buildings on his or her land. Most rights to light come into being by prescription; that is, by the continuous use of light over a period of years, usually 20.

How is compensation treated?

One of the first and perhaps the most important considerations for your client, is whether the receipt is capital or revenue. Assuming the client in question is not trading from or renting the property, the receipt will be capital in nature as it arose from the loss in value of her property, rather than a loss of income. The importance of this distinction is if it were revenue in nature, then it would be chargeable to income tax rather than capital gains tax. The two are mutually exclusive – s.37 Taxation of Chargeable Gains Act 1992 (TCGA 92) excludes from capital gains tax any amount which has been assessed to income tax.

Having determined that it is capital, s.22(1)(a) TCGA 92 deems a disposal to have been made (even though her property has not been sold) when the owner of an asset receives a capital sum by way of compensation.

What is a right of action?

A right to take court action for compensation is an asset for chargeable gains purposes. This is referred to as a “Zim-style” right. This stems from the precedent set in the case of Zim Properties Ltd v Procter [1985] BTC 42. The case involved a capital sum which had arisen as a result of legal action taken by the company in suing its solicitors for negligence, on the grounds that a sale of land had fallen through due to mistakes made by them in the contracts of sale. The company argued that the compensation derived from their interest in the land and therefore part of the original consideration in acquiring that land (its ‘base cost’ for CGT) should be set against the compensation, thus reducing the gain. The courts rejected this and decided that the asset in question was the company’s right of action against its solicitors and the capital sum was derived from that right and not from the land. Consequently, as there had been no consideration given for the acquisition of that right, the whole amount represented a chargeable gain.

However, caution should be taking when deciding on the origins of a payment. The fact that a person receives compensation or damages as a result of court action does not always mean that the sum will be treated as derived from the right of action. Each case will turn on its particular facts.


Following the decision in the Zim Properties case, in 1988 HMRC published Extra Statutory Concession D33 in order to help set out the conditions in which a payment deriving from a right of action will (or will not) give rise to a chargeable gain. ESC D33 only applies where the capital sum has been derived from a right of action.

The first point for Mrs X to consider in applying ESC D33 would be paragraph 9, which looks at the underlying assets. Paragraph 9 explains that “where the right of action arises by reason of total or partial loss or destruction of or damage to a form of property which is an asset for capital gains purposes, or because the claimant suffered some loss or disadvantage in connection with such from a property, any gains or loss in the disposal of the right of action may by concession be computed as if the compensation derived from that asset, and not from the right of action.” Confirmation of this view can be found in HMRC’s Capital Gains Manual at CG13020. The result is that where the underlying asset is (or would be if it were to be disposed) a chargeable asset, then any compensation received in respect of it is treated as a part-disposal of that underlying asset and a proportion of the base cost can be applied in computing the gain.

To contrast this, ESC D33 paragraph 11 sets out that where there is no underlying chargeable asset, then any compensation is exempt from CGT up to a limit of £500,000. An example of this would be a capital payment from the Financial Services Compensation Scheme received in respect of bad pension advice.

As Mrs X’s court settlement was derived from the ‘right to light’ action, which would be viewed as a disadvantage in connection with her residential property, paragraph 9 would apply. The underlying asset being her residential property, meaning that a proportion of the allowable cost of her underlying asset may be deducted in computing the gain.

The next thing to consider for Mrs X, would be any reliefs or exemptions. As per paragraph 10 of ESC D33 “if the relief was or would have been available on the disposal of the relevant underlying asset, it will be available on the disposal of right of action.”

This means Mrs X could look at what reliefs or exemption would be available on the disposal of her residential property. If the property was her only or main residence, private residence relief may be available under s.222 TCGA 92 to exempt the gain

The calculation of any chargeable gain would require the cost to be established under the “part disposal” rules of s42 TCGA 1992 – see CG12730P and CG71800C.


So, in essence the compensation is potentially taxable as it relates to the underlying asset of Mrs X, being the residential property itself. Whether there is any reliefs or exemptions available is another matter entirely, dependant on the facts.

Note that not all compensation payments arising from court settlement will necessarily derive from the right of action but may instead derive from the underlying asset itself. It is important to establish all the relevant facts in each individual case.

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Apprentice Tax Advisor
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Stuart started working for CTW in 2016 as a tax administrator on the overflow lines. He then moved into Finance in May 17 where he completed his AAT L2. He is now a member of the Tax team, currently studying for his ATT qualification and working towards being a valued member of the team.

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