Capital or revenue?

Compensation for the dilapidation of property

The lease of an apartment block was assigned to the taxpayer. The tenants were responsible for the upkeep of the flats but they failed to do so. Later the flats were vacant for a year because they were no longer fit for habitation although the tenant continued to pay the rent.

During that time negotiations took place with a view to reaching a settlement so that the lease would be terminated and the taxpayer could recover the flats to prevent further disrepair. These resulted in the payment of a £250 000 settlement to the taxpayer.

HMRC said the settlement should be treated as an income receipt because it covered the loss of rental income due to the dilapidated state of the flats.

The taxpayer argued that it should be treated as capital on the basis that it allowed him to protect...