To date, companies have been able to benefit from relief for inflationary gains in the form of the indexation allowance when they dispose of an asset.
For corporation tax purposes, a company which disposes of (or is deemed to dispose of) an asset acquired on or after 31 March 1982 receives an indexation allowance which is deducted in computing any chargeable gain.
Please note that the indexation allowance cannot create or increase a capital loss.
The allowance is calculated by multiplying the base cost of the asset by the change in the retail price index from the date when such expenditure was incurred to the date of disposal (or deemed disposal). HMRC publish indexation allowance tables each month.
The purpose of indexation allowance is to eliminate the effect of inflation in the chargeable gains calculation.
However, it was announced at the time of the Autumn 2017 Budget that the relief is to be frozen – the effect being that no relief will be available for inflationary gains arising on or after 1 January 2018.
Where an asset is disposed of on or after 1 January 2018, the indexation allowance will only be calculated up to December 2017. Where an asset is acquired after December 2017, no indexation allowance will be available to mitigate any gain on disposal.
The freezing of indexation allowance will bring the position of companies more closely into line with that of individuals. Individuals have not received relief for inflationary gains since the ending of taper relief in April 2008.
Indexation allowance – date of disposal is before 1 January 2018
Where the disposal takes place before 1 January 2018, the indexation allowance is computed by reference to the actual month in which the disposal took place.
Example
Snowglass Ltd sold a capital asset for £200,000 in October 2017. The asset was acquired in April 2014 for £140,000.
Using HMRC’s indexation allowance table for October 2017, the indexation factor for April 2014 is 0.077.
The indexation allowance is found by multiplying the indexation factor by the cost of the asset.
The indexation allowance is, therefore, £140,000 x 0.077 = £10,780.
The gain chargeable to corporation tax is, therefore, £200,000 – (£140,000 + £10,780) = £49,220.
Indexation allowance – date of disposal on or after 1 January 2018
Where an asset is disposed of after 2018, the indexation allowance is calculated by reference to the indexation factor for December 2017, regardless of the actual date of disposal.
This means that the indexation allowance for an asset acquired before 1 January 2018 will be the same, regardless of whether it is disposed of in January 2018 or December 2018.
No relief is given for inflation beyond 31 December 2017.