The disappearance of corporate Indexation Allowance?

by | 28 April 2023

In 1998 Indexation Allowance was paused for individuals, then in 2008 this valuable allowance was removed entirely, inflating capital gains overnight as a consequence. Fast forward to 2017, Indexation Allowance was paused in the December for companies. If the government replicate their previous decision, companies could lose the Indexation Allowance accrued by the end of 2027.

In the government’s own economic impact statement in 2017 it stated that, “ This measure is not expected to have any significant macroeconomic impacts. The costing includes a behavioural effect to account for the affected population finding ways to mitigate the impact of the changes. ”

The indexation factor for companies owning relevant assets since March 1982 is 2.501. This means that a March 1982 value of £100,000 generates an Indexation Allowance of £250,100, attracting additional Corporation Tax relief of £62,525. This demonstrates that even assets with a relatively small cost can attract valuable corporation tax relief via Indexation Allowance.

The following steps are therefore advised:

  1. Review assets which are subject to the Capital Gains Tax regime e.g. land, property, equipment which hold their value, corporate shareholdings not attracting SSE.
  2. Consider:
    • The future use of the asset and its balance sheet location e.g. property with development potential moved to current assets?
    • Whether it is owned by the appropriate group member, bearing in mind degrouping charges.
    • The level of anticipated developments in your sector and whether the asset is future proofed e.g. time to sell and reinvest in modern premises using rollover relief?
    • Your succession plan e.g. family, management, third parties and their interest in the company assets.
    • With the lifting of the pension fund lifetime limit, now might be the time to reconsider the company SIPP/SSAS assets with your IFA.
  3. Calculate the level of Indexation Allowance which each asset attracts to determine whether accelerating your plans make commercial sense; noting that Indexation Allowance cannot create or increase a capital loss.

Remember those companies not resident in the UK but which own UK residential and commercial property are now subject to the UK Corporation Tax regime. Indexation Allowance may therefore still be a factor for those operating offshore.

Please get in touch if we can be of assistance with your commercial plans.

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