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Corporation Tax – Indexation allowance – time to use it or lose it?

Date posted: 22nd Oct 2018

As you may be aware, indexation allowance was frozen from December 2017.

Therefore for any capital gains made by a corporate after January 2018, the indexation allowance will only be calculated to December 2017. This means there would be no ‘inflation’ adjustment for the periods post December 2017.

Whilst this may not be too much of a problem as there could still be a significant indexation allowance ‘deduction’, what you may recall is that indexation allowance used to be available for individuals but was frozen in 1998 and completely abolished in 2008. If a future Government were to take a similar approach with corporates, then this could leave companies with much higher tax liabilities post any future abolition.

Example

Manufacturing Co Limited bought premises in June 1990 for £200,000. It sells the premises in June 2020 for £500,000.

The capital gain would be £300,000 but indexation allowance would reduce this by c£240,000 making the taxable capital gain £60,000 – tax of c£10,000.

If indexation allowance were abolished, then the tax charge would be £51,000.

The indexation allowance saves tax of c£41,000.

What can be done?

This may not be entirely practical, but the company could consider selling the property. This would give rise to some stamp duty land tax charges and of course legal fees, so this may not be ideal.

Alternatively, if the company is part of a group, then as you may be aware, assets can be moved around group companies without any immediate capital gains tax consequences. The transferor therefore has neither a gain or a loss and the transferee effectively takes over the transferor’s capital gains cost augmented by indexation allowance. Therefore an intra-group transfer would “bank” the indexation allowance ahead of any future sale and the tax base cost of the asset would increase.

If the company is not part of a group, then perhaps a group holding company could be set up to hold the property outside of the trading company. Tax clearance may be needed from HMRC for this transaction.

There are numerous other considerations to take into account, so specialist tax advice should be taken.

Of course, indexation allowance may not be abolished but its still worth giving this some consideration. If you require some tax advice then contact us today.


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