The Autumn budget saw both positive and negative implications for companies this year. Whilst corporation tax remained at 19% with the continued promise of this being reduced to 17% by 2020, changes were announced to the way in which chargeable gains are to be calculated, meaning from January 2018, companies, particularly those with long standing assets, will see a greater corporation tax falling due following an asset sale.
The current position is that any company looking to calculate their chargeable gain following the sale of an asset can allow for the effect of inflation by taking into account HMRC’s “indexation allowance”. Using HMRC’s guidance you calculate the indexation factor by taking the indexation allowance for the month and year that the asset was purchased, from the indexation figure for the month and year that it was sold. You then multiply the purchase price by the indexation factor, and deduct that from the profit before calculating the tax owed on the chargeable gain. This reduces the total gain and results in lower corporation tax being payable overall.
At present, companies can also do this for any improvements works, or fees spent in purchasing or selling the property. This can result in quite a significant reduction in some cases, particularly where those assets have been owned by the company for a long time.
From January 2018, the indexation allowance will be frozen, meaning “no relief will be available for inflation accruing after this date in calculating chargeable gains made by companies”. Phillip Hammond stated in his budget speech on Wednesday that this 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”.
The freezing of the indexation allowance is forecast to raise £525 million per year by 2022, and therefore go someway towards balancing out the £520 million per year tax cut expected from switching business rates from the Retail Prices Index to the Consumer Prices Index in April 2018.
With this change to calculating chargeable gains firmly in our minds, companies with long standing assets will certainly need to consider the benefits of selling those assets sooner rather than later.