In James Allan Thornton v HMRC [2016] UKFTT 767 the First Tier Tribunal (FTT) concluded that a dilapidation compensation payment made to a landlord was a capital, not an income, receipt.

  • The lease of an apartment block was assigned to the taxpayer
  • The flats were vacant, in disrepair and unsuitable for use, though rental income was still being received
  • The tenants were responsible for the upkeep of the flats but failed to comply
  • A compensation payment of £250,000 was agreed to terminate the lease and enable the taxpayer to take possession of the properties to prevent further disrepair.
  • HMRC assessed the payment as income: it considered it to be a loss of rental income.

The taxpayer appealed to the FTT arguing that the receipt was to enable him to safeguard a capital asset and was not to replace lost rental income.

The FTT agreed with the taxpayer:

  • The taxpayer had a capital asset which suffered a permanent diminution in value
  • The settlement was in consideration of that decrease in value
  • The lease was terminated due to the inaction of the tenant

The receipt was therefore a capital receipt for the taxpayer. The FTT stressed that this was based on the particular facts of the case and reminded us that there is no single test that settles the dispute of whether a receipt is capital or income.


Our guides:

Property & lettings: CGT and IHT issues

Property profits and losses: Adviser guide

Property profits & losses: toolkit (from 6 April 2016)

Case reference: James Allan Thornton v HMRC [2016] UKFTT 767