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Is there a penalty to doing so and if so what? Do your city centre improvements periodically get damaged and how bad is that if so?

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There is no penalty for settling on one type of tile of vs another. There are varying stats and bonuses for the different tile types but no penalties.

Building on top of a resource will give you access to that resource. See here for example.

Some tile types are favored more than others, such as plains hills, as your city will start with 2 hammers 2 food.

More information on this thread if you're curious.

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    "Building on top of a resource will give you access to that resource" - Well that's something I wish I knew when I started playing civ... I always assumed you'd lose the resource and just settled next to them :) Mar 16 '20 at 20:48
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    Worth noting that this answer changes slightly with the addition of the Gathering Storm DLC where floodplains can actually flood and damage your tiles which becomes a potential trade-off to consider. You can eventually build preventative buildings that can help or even benefit you for being on the tiles.
    – n_plum
    Nov 10 '20 at 15:01

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