Corporate Indexation Allowance abolished

[hiriskpaul]

I thought investors got off quite lightly in the budget with no increase in the dividend tax, cut in annual CGT exemption or pension limits and tax rebates, but I just spotted this change. That could be significant for anyone running their own personal investment company. I have some preference shares inside a limited company for which the capital gain was being slowly indexed away. No more it seems. He did not introduce an annual exemption allowance either that individuals receive, or lower the corporation tax rate for capital gains, so hardly consistent tax treatment.

[PinkDalek]

I was just replying elsewhere on the subject, so have the Policy Paper link to hand:

https://www.gov.uk/government/publicati ... nuary-2018

Not abolished but frozen.

It impacts all those with chargeable assets held within a vehicle subject to Corporation Tax. Including those, for instance, who incorporated their BTLs. At least the existing indexation remains at the freezing date and the proposed lower rate of Corporation Tax in a few years’ time to 17% should reduce the potential burden for those who have a relatively low base cost in any event.

[hiriskpaul]

Yes, quite right. I should have said Future Indexation Allowance abolished.

As well as investors, this is likely to influence business behaviour going forward. To dispose of an asset that has appreciated and be hit for a larger CT bill than would have been the case with indexation, or to hang on to assets for longer type decisions.

[Eboli]

Two quick points.

1. Capital gains tax without an allowance for inflation becomes a problem when inflation rises - the history of the three CGT changes made in 1982, 1985 and 1988 are instructive here because it took three bites at the cherry to truly remove the tax on inflationary gains once the tax became principally a tax on inflation if inflation rises to the sorts of levels previously seen. I appreciate that what we are really talking about is Corporation Tax on capital gains, but the distinction is not important here.

2. Indexation was frozen for individuals when taper relief was introduced by Gordon Brown. The logic of continuing it for companies at that time was simply companies did not qualify for any taper relief (remember that?). The anachronism, if there is one, is that when indexation for individuals was abolished by Alistair Darling for the quid pro quo of a reduced rate of tax and abolition of taper relief, that this did not carry over when corporate taxation was steadily reduced. Perhaps this is a simply catch up process?

Incidentally, Hammond is fully aware that the optimal raising rate of CGT and CT on capital gains is c 16-18% - or at least was prior to his elevation to Chancellor. On any consistent view the rates of personal CGT at 28% (for higher rate individuals and on property) are too high. But in the current climate the backlash over a reduction in CGT rates would recall the reasons why they were introduced (remember those "city slickers" paying tax rates far less than the cleaners of their offices?)

Eb.