Company Capital Gains Tax indexation relief is frozen. Ouch.

Before the Autumn Budget, the Capital Gains Tax (CGT) calculations for companies included a relief called the indexation allowance. Basically, this allowed a company to increase the deemed acquisition cost of an asset by the annual rate of inflation. If the deemed purchase cost of an asset being sold is increased, the taxable gain when it is sold is reduced and there is less tax to pay.

Without this relief, any CGT payable on the sale of the asset will increase. Instead of deducting the cost plus the inflation proofed indexation allowance, companies will now only be able to claim the actual amount they paid for an asset when they bought it.

This allowance has effectively been axed in the budget last week.

Assets owned prior to 1 January 2018

Companies that currently own assets that will be subject to a CGT payment when they are sold will have any indexation relief capped at the RPI for December 2017. Accordingly, they will still get a measure of relief up to this date.

Assets acquired on or after 1 January 2018

Assets acquired on or after 1 January 2018 will no longer attract any indexation relief.

Companies should therefore be aware that if inflation continues to rise they will be paying tax on the inflated value of the asset when it is sold. The amount of tax eventually payable will increase each month as inflation increases the potential sales price and profit.

According to HMRC:

“The measure aligns the treatment of capital gains by companies with that for individuals and non-incorporated businesses for whom indexation allowance was abolished in 2008. It will also align the treatment of capital disposals with disposals of similar assets as part of a company’s trading activities.

In addition, it will simplify tax computations and remove a source of potential errors.”

Bottom line?

What this measure will do of course, is to increase the Corporation Tax of companies that dispose of any asset which is subject to Capital Gains Tax.