Do You Pay Tax on Rights of Light Compensation? A Practical Guide

Do You Pay Tax on Rights of Light Compensation?

A practical guide for homeowners, executors and property owners

For most homeowners, the first and most important question is whether the affected property is their only or main residence.

If it is, Principal Private Residence relief may apply, meaning there may be no capital gains tax payable on the compensation.

That does not mean the position should be ignored. The correct treatment should still be checked with an accountant or tax adviser, particularly if the property has been let, partly used for business, inherited, owned by an estate, or is being sold.

Where the affected property is not the owner’s main residence, for example a second home, buy-to-let, investment property, commercial property or estate asset, the tax position may need more careful consideration.

In those cases, rights of light compensation is generally understood as a capital receipt, rather than ordinary income. It is usually connected to the release, surrender or non-enforcement of a property right, or compensation for injury to the property. That means it is normally considered under the capital gains tax rules rather than income tax rules.

This article sets out our practical view as rights of light surveyors. It is not tax advice.

Quick answer: is rights of light compensation taxable?

Rights of light compensation is usually considered in two broad categories.

1. Main residence homeowners

Where the affected property is your only or main residence, Principal Private Residence relief may apply.

In many ordinary homeowner cases, this may mean there is no capital gains tax payable on the compensation.

However, the position should still be checked if:

• the property has not always been your main residence
• the property has been partly let
• part of the property has been used for business
• the property is owned by an estate
• the compensation is received close to a sale
• you own more than one property
• the property is owned by a company, trust or other structure

2. Second homes, investment properties, estates and commercial property

Where the property is not your main residence, the compensation will usually need to be considered under capital gains tax principles.

Rights of light compensation is generally treated as capital in nature because it relates to the property and the rights attached to it. Depending on the facts, the payment may be treated as a capital sum derived from the property, a deemed disposal or part-disposal, or something that affects the property’s base cost for capital gains tax purposes.

That does not automatically mean tax is payable immediately, but the receipt should be reviewed by an accountant or tax adviser.

The short answer

Rights of light compensation is usually not treated as ordinary income.

For homeowners, the first question is whether the affected property is their only or main residence. If it is, Principal Private Residence relief may apply, and there may be no capital gains tax payable.

For second homes, investment properties, commercial properties and estate-owned properties, the compensation is still usually capital in nature, but the tax position may be more relevant. The payment may need to be considered as part of a capital gains tax calculation.

The key point is that rights of light compensation is generally linked to the property itself, not to employment, rent, trading income or ordinary income.

Why your main residence matters

Principal Private Residence relief is an important relief for homeowners.

Broadly, it can relieve capital gains tax where a person disposes of, or is treated as disposing of, an interest connected with their only or main residence.

For many homeowners receiving rights of light compensation in relation to the home they live in, this may mean there is no capital gains tax payable.

However, the position can become more complicated where:

• the property has not always been occupied as the owner’s main home
• the owner has more than one property
• the property has been let to tenants
• part of the property has been used exclusively for business
• the property has been inherited
• the compensation is received by executors
• the property is sold around the same time as the compensation is paid

This is why homeowners should not panic, but should still ask their accountant or tax adviser to confirm the treatment.

Why rights of light compensation is usually capital in nature

A right of light is a property right. It is a legal easement that can benefit one property and restrict the development potential of neighbouring land.

When a neighbouring development causes, or is likely to cause, an actionable loss of light, the affected owner may be entitled to compensation.

That compensation is usually paid because the owner is:

• releasing or surrendering a right
• agreeing not to enforce a right
• entering into a deed of release
• accepting compensation for injury to the property
• allowing a neighbouring development to proceed without pursuing an injunction

That is why rights of light compensation is normally viewed as being linked to the property, rather than as ordinary income.

In simple terms, the payment is usually made because of the property right, not because the owner has earned income.

Section 22 TCGA 1992 and rights of light compensation

Section 22 of the Taxation of Chargeable Gains Act 1992 is often relevant when considering compensation received in respect of property rights.

Section 22 applies where a capital sum is derived from an asset. It can include capital sums received for the surrender or release of rights, or for refraining from exercising rights.

That wording is highly relevant to rights of light claims.

In many rights of light settlements, the property owner receives compensation in return for agreeing not to enforce their right against the developer. This is often documented through a deed of release or settlement agreement.

In practical terms, the payment may be treated as a capital sum derived from the property, or from the right attached to the property.

This is why rights of light compensation is usually considered under capital gains tax principles.

Does rights of light compensation create an immediate tax bill?

Not necessarily.

This is the point that is often misunderstood.

A payment being capital does not automatically mean it is tax free. Equally, it does not automatically mean the recipient will immediately have tax to pay.

Depending on the facts, rights of light compensation may be treated as:

• a capital sum derived from the property
• a deemed disposal or part-disposal
• a receipt that reduces the base cost of the property
• a gain that is covered, in whole or in part, by Principal Private Residence relief
• a receipt that needs to be included in a wider capital gains tax calculation

The correct outcome depends on the ownership structure, use of the property, timing of the payment and whether the property is later sold.

What if the property is your main residence?

If the affected property is your only or main residence, Principal Private Residence relief may apply.

This means that, in many homeowner cases, there may be no capital gains tax payable on the compensation.

However, the position should still be checked.

This is particularly important where:

• the property has not always been the owner’s main residence
• part of the property has been let out
• part of the property has been used for business
• the owner has more than one property
• the compensation is received close to a sale
• the claim is being dealt with by executors after death

The safest approach is to ask an accountant or tax adviser to confirm the position.

What if the property is a second home?

Where the property is a second home, rights of light compensation is still usually capital in nature, but the tax treatment may be more relevant.

The payment may need to be considered as part of a capital gains tax calculation. It may affect the property’s base cost, or be treated as a part-disposal or deemed disposal, depending on the precise facts.

This does not necessarily mean tax is payable straight away, but it does mean the receipt should not be ignored.

What if the property is a buy-to-let or investment property?

For buy-to-let or investment properties, rights of light compensation should usually be considered under capital gains tax principles.

However, there can be nuance.

For example, if compensation is genuinely paid for loss of rental income, rather than for release of a property right or injury to the property, a different treatment may be possible.

That distinction matters.

Most standard rights of light settlements are not paid as compensation for rent. They are paid because the owner has a property right and agrees not to enforce it against a neighbouring development.

Where a property is let, held as an investment, or owned for capital growth, the owner should ask their accountant to confirm the treatment.

What if the property is owned by an estate?

Executors should take particular care.

Where a rights of light claim is continued after the death of the original owner, the compensation will usually be received by the estate.

The tax treatment may depend on:

• the date of death valuation
• whether the property was the deceased’s main residence
• whether the property is being sold
• whether compensation is received before or after completion
• whether the estate or beneficiaries receive the compensation
• how the payment is treated in the estate accounts

In estate cases, executors should ask the probate solicitor or accountant to confirm the treatment before finalising distributions.

Daylight Protect can explain the nature of the claim and the basis on which the compensation has been paid, but we cannot advise on the estate’s tax position.

What if the property is owned by a company?

If the affected property is owned by a company, the tax position may differ from an individual homeowner case.

The compensation may still be capital in nature, but the company’s corporation tax position, base cost, accounts treatment and property ownership structure should be reviewed by an accountant.

Company-owned property, commercial property and investment portfolios should always be considered separately from ordinary homeowner claims.

Practical example: main residence

A homeowner receives £30,000 from a developer because a new building will interfere with the light enjoyed by their home.

The homeowner signs a deed of release confirming that they will not bring a rights of light claim or seek an injunction against the development.

In that situation, the payment is likely to be viewed as compensation connected to the property and the release or non-enforcement of a property right.

If the property is the homeowner’s only or main residence, Principal Private Residence relief may apply. This may mean no capital gains tax is payable.

The homeowner should still keep a record of the payment and ask their accountant to confirm the position.

Practical example: second home or investment property

A property owner receives compensation because a neighbouring development interferes with light to a property they do not occupy as their main home.

The payment is still likely to be capital in nature because it relates to the property and the rights attached to it.

However, because the property is not the owner’s main residence, Principal Private Residence relief may not apply.

In that situation, the compensation may need to be considered as part of a capital gains tax calculation. Depending on the facts, it may be treated as a part-disposal, a capital sum derived from the property, or a receipt that affects the property’s base cost.

The owner should take advice from an accountant or tax adviser.

Practical records to keep

If you receive rights of light compensation, keep clear records of:

• the gross compensation figure
• professional fees deducted
• any insurance premium or funding cost
• the deed of release or settlement agreement
• the affected property address
• whether the property was your main residence
• whether the property was let or used commercially
• the date the compensation was received
• whether the property was later sold
• whether the compensation was paid to you personally, to a company, to a trust or to an estate

These records will help your accountant or tax adviser confirm the correct treatment.

Our practical view

In our view, rights of light compensation is generally best understood as a capital receipt connected to the affected property.

That is because the payment is usually made in return for the release, surrender or non-enforcement of a property right, or as compensation for injury to the property.

For many homeowners, particularly where the affected property is their only or main residence, Principal Private Residence relief may mean there is no capital gains tax payable.

For second homes, investment properties, commercial properties, company-owned properties and estate-owned properties, the tax position may need more careful consideration.

Daylight Protect are rights of light specialists. We are not tax advisers and do not provide tax advice. We can, however, explain the nature of the claim, the basis of settlement, and the compensation structure to your accountant, probate solicitor or tax adviser.

Frequently asked questions

Is rights of light compensation taxable?

Rights of light compensation is usually considered under the capital gains tax rules rather than as ordinary income. Whether tax is actually payable depends on the facts, including how the property is owned, whether it is the owner’s main residence, and whether any reliefs are available.

Is rights of light compensation income?

Usually, no. In most cases, rights of light compensation is not ordinary income. It is normally capital in nature because it relates to a property right, the release of that right, or compensation for interference with the property.

Do I pay capital gains tax on rights of light compensation?

You may need to consider the payment for capital gains tax purposes. However, that does not automatically mean you will have tax to pay. Principal Private Residence relief, base cost adjustments and other factors may affect the outcome.

Is rights of light compensation tax free if it is my main residence?

If the property is your only or main residence, Principal Private Residence relief may apply. This may reduce or eliminate any capital gains tax liability. You should still ask your accountant or tax adviser to confirm the position.

What if the affected property is a second home?

If the property is a second home, the compensation may need to be considered in a capital gains tax calculation. The payment may affect the base cost of the property or be treated as a part-disposal, depending on the facts.

What if the property is a buy-to-let?

If the property is a buy-to-let, the compensation is still usually capital in nature if it relates to the release or non-enforcement of rights of light. However, the owner should take advice because the tax treatment may depend on the exact nature of the payment.

What if rights of light compensation is paid to an estate?

If compensation is paid to an estate, the executors should ask the probate solicitor or accountant to confirm the correct treatment. The answer may depend on the date of death value, sale timing and how the compensation is received.

What if the compensation is paid to a company?

If the property is company-owned, the company’s accountant should advise on corporation tax, capital treatment and the accounting treatment of the receipt.

Can Daylight Protect give tax advice?

No. Daylight Protect are rights of light specialists, not tax advisers. This article provides general information only. Tax advice should be obtained from a qualified accountant, tax adviser or solicitor.

Disclaimer

This article is provided for general information only and reflects our practical opinion as rights of light surveyors. It does not constitute tax, legal, accounting or financial advice.

Tax treatment depends on individual circumstances and may change. You should obtain independent advice from a suitably qualified accountant, tax adviser or solicitor before relying on any tax position.

Daylight Protect cannot advise whether tax is payable on any specific compensation payment. We can explain the nature of a rights of light claim and the basis on which compensation has been agreed, so that your accountant or tax adviser can advise you properly.