Marriage allowance, Indexation allowance, and Business rates

The headline above is taken from our latest tax tips email for accountants in which we said:

The Budget contained little meat for small businesses, as there were few major tax changes. However, there are three important issues which you should discuss with your clients. These are; a change to the marriage allowance rules; freezing of the indexation allowance for companies, and correcting an unfortunate Supreme Court decision regarding business rates, aka the “staircase tax”.

Below is just an extract from our latest email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

The capital gains indexation allowance adjusts the base value of an asset by general inflation, as measured by the retail price index (RPI), over the period of ownership, or since 31 March 1982 if the asset was acquired earlier. The effect is to reduce the taxable amount of the capital gain on disposal of the asset.

Indexation allowance was frozen for individuals and trustees from 6 April 1998, and was removed completely from the CGT computations of those taxpayers from 6 April 2008. The Budget announced that indexation allowance will be frozen for companies from 1 January 2018, so the last month for which indexation will be calculated on the disposal of an asset is December 2017.

It is telling that the policy paper on this issue talks about “removal” of the indexation allowance, not the freezing of the allowance, so this Budget change could be the first step to removing indexation allowance from capital gains calculations completely.

Indexation allowance can mean a company pays much less tax on a gain than an individual would pay on the same disposal.

For example, when disposing of a residential property a company would pay tax at 19% on the gain after indexation, and an individual would pay tax at 28% on the unindexed gain. If the individual is a basic rate taxpayer he would pay CGT at 18% on the portion of the gain which sits within his available basic rate band, but a significant property gain is likely to quickly use up the basic rate band. The individual can set their annual exempt amount (£11,700 for 2018/19) against the unindexed gain, which is not available to the company.

Where your client is planning to sell properties, or any other assets, out of their company it may be better to sell sooner rather than later, to take advantage of the indexation allowance while it is still available. However, transferring the ownership of a property purely to crystallise the indexation allowance may not be worthwhile, as the legal costs and SDLT (LBTT in Scotland) will eat into any tax saving.

Remember that this is just an extract from  our weekly email for accountants. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)