Damaged assets

In this lesson

1. 0:00 Damaged assets overview
2. 0:19 Insurance proceeds and part disposal rules
3. 1:13 Election to avoid part disposal
4. 2:00 Worked example: painting water damage
5. 3:25 Revised base cost for future disposals

About this lesson

You'll discover the difference between receiving insurance proceeds (which triggers a part disposal calculation) and restoring the asset, plus how the 95% restoration rule can eliminate your tax liability. This is essential for TX (Taxation) and ATX (Advanced Taxation) papers, where damaged asset scenarios frequently appear in exam questions. The core technique involves calculating a part disposal when insurance proceeds are received. The proceeds represent a disposal of the damaged portion, so you apply the standard formula: cost is calculated as original cost multiplied by proceeds divided by proceeds plus the market value of the damaged asset. However, if you use more than 95% of the insurance proceeds to fully restore the asset to its pre-damage condition, you can elect to avoid this calculation entirely. Instead, you simply adjust the asset's base cost by deducting the insurance proceeds and adding back your restoration expenditure. The practical application matters because many students mistakenly calculate gains when relief is available. Understanding when the 95% restoration election applies saves you from overstating tax liabilities in exam scenarios. The illustration walks through both routes: the standard part disposal computation (which produces a £9,100 gain) and the election outcome (which eliminates the gain and adjusts future base cost). Mastering this distinction ensures you handle damaged asset questions confidently and accurately.

Duration: 4m