Property owning companies are likely to face a significant increase to their future tax liabilities because indexation is being frozen at December 2017.
Indexation provides a relief against inflation by effectively increasing allowable expenditure in line with the Retail Price Index (RPI). The indexation freeze comes at a time when inflation is rising, with the December RPI figure showing a 4.1% increase for 2017. Although the rate of corporation tax itself is to be reduced from 19% to 17% in 2020, this may not compensate for the change.
A company bought a freehold property in May 2000 for £140,000 and sold it in November 2017 for £400,000. During this period the RPI increased by 61.6%. So, the £140,000 base value for the gain is uplifted by 61.6% – £86,240 – reducing the taxable gain to £173,760, which will be subject to corporation tax.
It is important to emphasise that the indexation relief is just being frozen, not abolished as it was for individuals and trusts. It will continue to apply to all assets a company acquired before December 2017.
For assets acquired earlier with a disposal date of January 2018 or later, you will be able to calculate the indexation relief based on the RPI index figure for the date you acquired the asset and the December 2017 indexation figure.
Although indexation is given for corporate capital gains generally, its freezing will be particularly felt in property sales.
Many buy-to-let investors have moved their properties into a company structure in response to the government’s crackdown on tax relief for finance costs. For example, if a company has purchased buy-to-let property costing £300,000 in 2018 and sells it in five years’ time, assuming an RPI increase of 20% over that period, it will have lost the benefit of indexation of £60,000. At a tax rate of 17%, the extra tax will be £10,200.