This year’s Finance Act marks the government’s final abandonment of attempts to exempt inflation from capital gains tax. Over the longer term, this particular change is likely to increase the tax burden for companies that sell investment assets. Property companies, for example, are likely to end up paying more tax.
The reason is the abolition of the “indexation” allowance. In the 1970s, when inflation ran into double figures, it was considered unreasonable to expect taxpayers to pay tax on gains arising due to the general rise in prices. So the indexation allowance was born to give both individuals and companies relief. A deduction equal to the inflationary increase in the cost of the asset was allowed in computing the gain on its disposal. The retail price index or RPI was used to measure of inflation.
Indexation was frozen for individuals in 1998 but has been allowed to continue for companies until December 2017. For future disposals by companies the indexation allowance will be available to relieve inflationary gains up to December 2017, but no relief will be given for subsequent inflation.
Whilst we no longer have double figure inflation the issue hasn’t entirely gone away, and could well be fuelled by weak sterling and higher oil prices. The Consumer Price Index, or CPI, has been higher than the Bank of England target for a while and the year on year RPI is running at 3.3%. This has meant that, for an asset held since 1982, indexation relief multiplied the deductible costs in the capital gains computation by a factor of nearly 2.5.
Over the long-term, asset rich companies are likely to miss the valuable benefits of indexation relief. However, as your company approaches an asset disposal, we can assist with calculating the expected tax and can ensure that any deductible costs and available reliefs are picked up in order to get the best outcome for your company. So if you would like to optimise the tax position for your company’s growth assets please speak to Clare Munro, email@example.com.