Is a dilapidations settlement capital or income

Is a dilapidations settlement capital or income

In James Allan Thornton v HMRC [2016], the First-tier Tribunal (FTT) considered the distinction between income and capital payments in relation to a dilapidations settlement and held that a payment to a landlord as compensation for dilapidations was a capital receipt.


James Allan Thornton owned 18 flats, known as Jordan House, Nairn (the property). The property had been the subject of a single lease.

The lease contained clauses concerning the repair and upkeep of the property for which responsibility lay with the tenants. The flats were vacant, in disrepair and unsuitable for use, although rental income was still being received

Following assessment by surveyors, a settlement payment was eventually agreed at £250,000 to reflect both the dilapidations and also a payment referable to a discounted rate of rent.

The dispute between HMRC and the Landlord concerned the treatment of the £250,000 settlement sum. The Landlord treated the £250,000 as a capital payment which he used to repair the property and thereby safeguard his capital investment.

HMRC argued that the settlement was income because it covered the loss of rental income, albeit due to the dilapidated state of the properties.

FTT's decision

The FTT was of the view that the whole of the settlement related to the costs of repairing the dilapidations and should be treated as capital rather than an income receipt.


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.