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A client, domiciled and resident in the United Kingdom, understands that he may be entitled to financial compensation, from the recent sale of two Berlin properties 'acquired' from Jewish residents by the Nazi Government just before the Second World War. One of these properties was owned by his grandfather and the other by his great-uncle, and he is likely to be entitled to a one-third share of both. This share is likely to be in excess of £200,000.
A client, domiciled and resident in the United Kingdom, understands that he may be entitled to financial compensation, from the recent sale of two Berlin properties 'acquired' from Jewish residents by the Nazi Government just before the Second World War. One of these properties was owned by his grandfather and the other by his great-uncle, and he is likely to be entitled to a one-third share of both. This share is likely to be in excess of £200,000.
The proceeds of these sales are currently held in Germany. I understand that up to 80 per cent of a valid claim will be paid out, the details of which are currently being handled by a lawyer in Germany.
Is my client liable to pay any form of tax on receipt of these amounts received? If this amount is taxable, are there any ways to mitigate this liability? Is the 15 per cent commission to the German lawyer an allowable expense?
(Query T15,997) - MJT.
Compensation in respect of confiscated property is a capital sum derived from a chargeable asset, and is potentially subject to capital gains tax under section 22, Taxation of Chargeable Gains Act 1992. The asset is not the original property itself, but the right to compensation. This was made clear in the case of Davenport v Chilver [1983] STC 426, which concerned compensation in respect of property confiscated in Latvia in 1940. See the Inland Revenue's Capital Gains Tax Manual at paragraphs 78702 to 78703 for a useful summary of this issue.
Based on the information in the query, it appears likely that 'MJT's' client will be able to rely on Extra-statutory Concession D50, which exempts any gains arising on the restitution of confiscated property, or the receipt of compensation, where this is received by the person
* who was the owner of the property at the time it was confiscated, expropriated or destroyed, or
* who has acquired their title, directly or indirectly, from the person who was the owner of the property at that time.
It should be noted that if any capital loss has been claimed in respect of the property, then the concession will not apply to the amount of the compensation which is equivalent to the allowable loss.
In the event that the client cannot rely on the concession, the commission to the lawyer should be an allowable expense under section 38(2), Taxation of Chargeable Gains Act 1992, as expenditure incurred wholly and exclusively for the purposes of the disposal. - ANA.
Reference should be made to Inland Revenue Extra-statutory Concession D50 (as revised) which was published in 'Update', Taxation, 25 January 2001 at pages 382 and 383.
The one-third entitlement mentioned presumably stems from inheritance through a parent or otherwise. The situation here differs from that explained in Inland Revenue Statement of Practice D33 where compensation reflects a right of action personal to the taxpayer. Instead, compensation for wrongful behaviour by a foreign government will often be recognised under a statutory order under the Foreign Compensation Act 1950 (see Davenport v Chilver [1983] STC 426). The current concession extends the relief to wider circumstances.
The client is assumed to have acquired title, directly or indirectly from the owner of the Berlin property at the time when it was expropriated. It is recommended that the lawyers acting be instructed to provide copies of all relevant documentation, with certified translations. Having regard to self assessment, the client should apply under the code of practice (leaflet 10) for confirmation that her circumstances qualify. If so, no question of relief for commission need arise.
While the compensation is clearly of a capital nature, there could be loadings for interest (or rent). In principle, these should be subsumed in the actual pay-out and similarly relieved of tax. On the other hand, any interest payable by the lawyers on the amounts subsequently in their keeping would represent taxable overseas income, subject to any double tax relief. - Lane.
To answer the question properly it is vital to know if the land was in East or West Berlin. The querist needs to ask for this information. Let me hypothesise that it was in the East. Such land would have been stolen by the Nazi's, and then occupied by Communists in East Berlin until 1989.
From a United Kingdom tax perspective what I understand one has is a capital gain based on the increase from the market value at March 1982 (or probate value if inherited after that date). If in East Berlin, the 1982 value must have been zero (because it could not reasonably have been imagined in 1982 that the Wall would come down in 1989). Therefore, what is restituted will often have zero cost but is subject to United Kingdom capital gains tax on sale (after reliefs for legal fees, costs of sale, indexation and taper reliefs).
This appears remarkably unfair, but does not seem to be covered by any of the existing concessions which deals with governmental compensation rather than property restitution. - DMT.
Editorial note. 'DMT's' view is a minority one, but could be important if Extra-statutory Concession D50 does not for some reason apply.
