If a local authority or government body acquires your property under compulsory purchase powers, that is a disposal for CGT purposes. The compensation you receive is treated as the disposal proceeds. You may owe CGT on the gain even though you had no choice about the sale. For the wider question of what events count as a CGT disposal, see our guide to what counts as a CGT disposal of UK property.
How the gain is calculated
The gain is the difference between the compensation received and your allowable costs (original purchase price, SDLT, legal fees, capital improvements).
If the property was your main home and PRR applies, the gain may be reduced or eliminated in the same way as a voluntary sale. The PRR calculation uses the actual period of occupation in the normal way.
Heads of claim: what counts as proceeds
Compulsory purchase compensation is typically split into:
- The basic loss: the market value of the property taken
- Disturbance compensation: costs of moving, legal fees, surveyor's fees for the CPO process itself, loss of business, and other consequential losses
- Injurious affection: if part of your land is taken and the retained land falls in value
The basic loss (the market value of the property) is your CGT disposal proceeds. Disturbance compensation is generally treated as separate from the capital disposal, potentially as a capital payment on the same disposal or in some cases as income, depending on the nature of the loss. Specialist advice is worth taking on how the different heads of claim are treated.
Special rollover relief for compulsory purchase
Section 247 of the Taxation of Chargeable Gains Act 1992 provides a specific rollover relief for compulsory purchase. If you use the compensation to acquire a replacement property within one year before or three years after the compulsory acquisition, you can defer the gain into the replacement asset. For the broader rules on rollover relief and which assets qualify in ordinary circumstances, see our guide to CGT rollover relief on UK property.
This relief applies to residential property acquired under compulsory purchase, which is broader than the standard Section 152 rollover relief (which does not apply to residential investment property in ordinary circumstances).
The conditions are:
- You must acquire a replacement property within the time window
- The replacement must be of the same nature as the one taken (broadly, it must be used for the same purpose)
- You must apply for the relief — it is not automatic
If you receive the compensation and do not reinvest, the gain is taxable in the year of the compulsory acquisition.
The 60-day return
If a chargeable gain arises on a compulsory purchase of UK residential property, the 60-day return applies. The acquisition date for the 60-day clock is the date of completion of the compulsory purchase, which is typically when the authority takes possession and the compensation is paid.
If you intend to claim Section 247 rollover relief, you still file the return within 60 days but note the intention to defer. The gain is provisionally assessed and then reversed once the replacement acquisition is confirmed.
Partial compulsory purchase
If only part of your land or property is taken, you have a part-disposal. Only a proportion of your base cost is matched against the partial proceeds, calculated using HMRC's part-disposal formula. If the part taken is small relative to the whole, the formula may produce a very small allowable cost against the compensation, resulting in a larger-than-expected gain.
Enhancement expenditure from the compensation
If you use the compensation to improve the replacement property rather than buying outright, the expenditure on the replacement may qualify as allowable expenditure on that property. This depends on the specific facts and how the rollover relief claim is structured.
LetsFile's Chartered Accountant/Chartered Tax Advisor can advise on the CGT treatment of compulsory purchase compensation, including how to structure a rollover relief claim if you are reinvesting the proceeds.