Before the Autumn Budget, the capital gains tax (CGT) calculations of companies included a relief called the indexation allowance. Basically, this allowed a company to increase the acquisition cost of an asset by the annual rate of inflation.
Without this relief, any CGT payable on the sale of the asset would increase. Instead of deducting the cost plus the inflation proofed indexation allowance, companies would only be able to claim the historical cost.
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 be able to claim indexation relief.
Companies should therefore be aware that if inflation continues to rise they will be paying tax on the inflationary value of the chargeable asset sold.
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.
What this measure will do, is to increase the corporation tax of companies that dispose of assets subject to CGT.
Source: New feed