Removal of capital gains indexation allowance

Is the tax man at it again? Introducing additional tax on individuals by stealth, that is.

The Autumn Budget contained proposals to change the tax treatment of capital gains for corporates. This will have a negative impact on the returns of taxable insurance savings products.

Companies currently receive indexation relief when calculating taxable capital gains on certain asset disposals, typically equities, real estate and collective investment schemes investing in such assets (although the latter are subject to “deemed disposals” each year).

Tax is currently based on the difference between the asset sale proceeds, and the purchase price increased by retail price index (RPI) inflation between the date of purchase and sale. This is designed to remove the effects of inflation, but not for much longer!

The government announced that the indexation allowance will be frozen from 1 January 2018.

"If an asset is held for five years, with growth at 4% per annum and inflation at 2% per annum, a policyholder might see a 10% fall in net growth "

With little fanfare and limited press coverage, the budget papers state that the aim of the change is to align the treatment of capital gains by companies with that for individuals and non-incorporated businesses for whom indexation allowance was abolished in 2008. It is also expected to simplify tax computations and remove a source of potential errors.

While it is hard to argue with these statements, the budget papers also suggest that the change “has no impact on individuals or households as it only affects companies”. Oh, come off it!

Unless there is a last-minute change of heart to exempt insurers, we think the proposals have a potentially material detrimental effect on taxable insurance savings contracts and therefore the individuals and households that have such investments.

Some simple calculations show that if an asset is held for five years, with growth at 4% per annum and inflation at 2% per annum, a policyholder might see a 10% fall in net growth following the proposed change. Ouch!

We understand industry bodies are urging HMRC to think again.