Second homeowners and buy-to-let landlords operating as individuals have been paying more capital gains tax than businesses, but this is set to change.
When an asset, such as a second home, is sold for a higher value than what was originally paid for it, capital gains tax of up to 28% of the price rise must be paid by the seller.
Unless, that is, the seller is a corporation, in which case the same capital gains tax applies but with a relief linked to inflation – the level of inflation can be deducted from the amount of capital gains, saving the company money. This is an indexation allowance.
In this week’s Autumn Budget, Phillip Hammond revealed that from January 2018, the indexation allowance would no longer be available to companies.
“There is a case now for removing the anomaly of the indexation allowance for capital gains – bringing the corporate system into line with personal capital gains tax,” Hammond said. “I will therefore freeze this allowance so that companies receive relief for inflation up to January 2018, but not thereafter.”
Other assets
Although the property market is an area where this change will be key, due to the nature of capital appreciation in the housing sector, it will affect all assets that are subject to capital gains tax.
The move is expected to bring in an extra £1.2bn over the next five years and will affect a huge number of businesses.
According to Yvette Nunn, owner partner and director of advisory firm Berkeley Associates, the effects will be mainly felt when inflation rates are high.
“The government has announced this measure as bringing companies in line with individuals (who cannot claim any relief for inflation related increases in assets values),” she said.
“However, it does not completely level the playing field, as individuals are entitled to a tax-free annual exemption for chargeable gains (currently £11,300) which is not available to companies.
“When inflation rates are relatively low, indexation allowance may not make much of a difference to the calculation of company gains. However, it does become more important in times of high inflation.”
Inflation rates according to October’s figures are now at around 3%, the highest they’ve been since April 2012.
