In a surprise move, the Chancellor has announced plans to freeze the capital gains indexation allowance and set it in line with Retail Price Index (RPI) fixed as of December 2017 and it will not be reviewed monthly as the current practice
No relief will be available for inflation accruing after this date in calculating chargeable gains made by companies and therefore no inflationary factors will be taken into account. This is a significant revenue earner for the government, raising £1.24bn over the course of this parliament.
For disposals of assets on or after 1 January 2018, the indexation allowance will be calculated using the RPI or factor for December 2017, irrespective of the date of disposal of the asset.
The indexation allowance is given when companies calculate chargeable gains and is a tax relief which allows companies to write off the inflation from the value of an asset when it is sold.
The freeze in this allowance means that companies will not receive relief for any increase in an asset’s value due to inflation which accrues after 1 January 2018.
This technical change will raise £1.2bn over the next five years and the government said it will bring the UK in line with other major economies and broaden the tax base through removing relief for inflation that is not available elsewhere in the tax system.
Yvette Nunn, co-chair of ATT’s technical steering group, said: ‘The government has announced this measure as bringing companies in line with individuals (who cannot claim any relief for inflation related increases in assets values).
‘However, it does not completely level the playing field, as individuals are entitled to a tax free annual exemption for chargeable gains (currently £11,300) which is not available to companies.
‘When inflation rates are relatively low, indexation allowance may not make much of a difference to the calculation of company gains. However, it does become more important in times of high inflation.’
ATT is also calling on the government to keep the policy under review rather than freezing the rate indefinitely.
Legislation will be introduced in Finance Bill 2017-18.
This measure changes the calculation of indexation allowance so that for disposals of assets on or after 1 January 2018, indexation allowance will be calculated using the Retail Price Index or factor for December 2017, irrespective of the date of disposal of the asset.
Corporation Tax: removal of capital gains indexation allowance from 1 January 2018