Cold times ahead with the freeze on indexation allowance for corporates

Indexation allowance acts to remove the effect of inflation from corporate capital gains.

The result can be significant. For example, a property bought in March 1982, costing £100,000 and sold in November 2017, would attract an indexation allowance of up to £247,200. As such, the property would have to be sold for more than £347,200 to create a taxable gain.

Indexation allowance for individuals was abolished in 2008 and part of the policy objective of the proposed freeze for corporates from 1 January 2018 is to align ‘the treatment of capital gains by companies with that for individuals and non-incorporated businesses’.

Freezing indexation will be a big deal for affected companies. However, little was made of this announcement within the press coverage of the Budget. Perhaps this is because the impact will only be felt as time passes and the effects of inflation start to be taxed.

Furthermore, as most companies only realise chargeable gains from time to time and rollover relief can often be used to defer gains on trading assets, indexation allowance isn’t high on many companies’ priority list.

While these measures seem to have flown in under the radar, the value to the Exchequer is far from insignificant. The policy costings document shows this measure as the single highest earner from all those announced in the Autumn Budget, with an estimated increase in tax take of £1.77bn over the next six years.

Those of us who have been working in tax for some time will know some tax allowances or limits have changed very little, or not at all, for many years - meaning the benefit of these allowances have reduced in line with inflation over time, creating a tax rise in real terms with no need to make any changes to the legislation.

Given the current government’s commitment to keep corporate tax rates low and not to raise income tax, perhaps we should expect to see further increases to the tax take through more low profile amendments, or indeed by inaction.

For more information please contact Nick Blundell.