Income Tax (Trading and Other Income) Act 2005 section 106

Sums recovered under insurance policies etc.

Section 106 deals with the tax treatment of capital sums recovered under insurance policies or contracts of indemnity where a deduction has already been allowed for the underlying loss or expense.

• Where a trading loss or expense has been deducted in calculating trade profits, and the trader recovers a capital (non-revenue) sum under an insurance policy or indemnity contract in respect of that loss or expense, the recovered sum must be brought into account as a trading receipt.
• The amount treated as a trading receipt is capped at the amount of the original deduction — the trader cannot be taxed on more than was previously deducted.
• Revenue sums recovered under insurance or indemnity contracts do not need special treatment under this section, as they are already dealt with under normal trading income rules.
• The timing of when the receipt is recognised follows the accountancy treatment, rather than requiring an adjustment back to the year in which the original loss or expense occurred.