The following articles have been extracted under a licence from HM Revenue & Customs website:
Introduction
Assets and disposals
Working out the chargeable gain
Reliefs (other than taper relief)
Allowable losses
Taper relief: qualifying holding period
Taper relief: business assets and non-business assets
Working out the tapered chargeable gains
Working out the amount chargeable to CGT
Working out the tax due
Post transaction valuation checks for CGT
Indexation allowance
Taper relief on disposals of business assets on or before 5 April 2000
Introduction
This series of articles tell you the basic rules of Capital Gains Tax (CGT) for individuals.
This article explains the indexation allowance procedures involved with Capital Gains tax.
Indexation allowance is an allowance which adjusts gains for the effects of inflation up to April 1998. It does this by giving an allowance equal to the amount by which the cost of the asset would have risen on a monthly basis if its value had kept pace with inflation, as measured by the increase in the Retail Prices Index (RPI), since the asset was acquired. No allowance is due for periods after April 1998. So assets acquired on or after 1 April 1998 do not qualify for indexation allowance.
This is a complex area. If you have difficulty, you can ask us for help. You may also ask to see a copy of the Inland Revenue Capital Gains Manual, which explains the rules for indexation allowance in detail.
How is indexation allowance calculated?
Indexation allowance is based on the increase in the RPI between
- the month in which the asset was acquired or, for subsequent expenditure, the month in which the expenditure on the asset was incurred, or 31 March 1982 if that is later, and
- the month in which the asset was disposed of, or April 1998, if that is earlier.
This article only explains the position for assets disposed of after 5 April 1998. For assets disposed of before that date please ask for help.
In order to work out your indexation allowance, you need to look at the table at the end of this Appendix. This gives details of the indexation factor to be used in calculating the rise in the RPI between the month in which you incurred the expenditure on the asset and April 1998. The table shows a figure next to every month between March 1982, when indexation allowance was introduced, and March 1998. Take the indexation factor next to the month in which you incurred the expenditure and multiply this by the expenditure. This gives the amount of the indexation allowance which can be deducted in computing the chargeable gain.
Example
You bought an asset in March 1992 for £1,000, and sold it in June 1999 for £5,000. The indexation factor to be used for an asset acquired in March 1992 is 0.189. Multiplying this by £1,000 gives an indexation allowance of £189.
Proceeds £5,000
Less Cost £1,000
Gain before indexation £4,000
Less Indexation £189
Indexed gain £3,811
Remember that taper relief may also be available for the holding period after 5 April 1998 (see Article 6 Taper relief).
What about losses?
Indexation allowance can reduce or eliminate gains which are chargeable to tax, but for disposals on or after 30 November 1993, you cannot use indexation allowance to turn a gain into a loss or to increase your loss.
Example
You sell an asset in May 1999 for £20,000. It cost you £30,000 in November 1993. You have made a loss of £10,000. You cannot deduct any indexation allowance because the allowance cannot be used to increase the amount of a loss.
Which costs attract indexation allowance?
You can deduct indexation allowance from your gain if you have any of the following types of expenditure:
- the cost of an asset
- the incidental cost of acquiring an asset
- the cost of creating an asset if it was not acquired.
Any of these types of expenditure is treated as having been made when the asset was acquired or created. The rules for working out the date of acquisition are the same as for the date of disposal (see article 2 Assets and disposals).
Example
You acquire an asset under a contract made in March 1993.
Payment does not have to be made until June 1993. When you calculate your indexation allowance you should treat the expenditure as if it had been made in March 1993.
You can also deduct indexation allowance if you have either
- expenditure on enhancing the asset, or
- expenditure on establishing, preserving or defending your title to the asset.
Either of these types of expenditure is treated as having been made when that expenditure became due and payable.
Example
In May 1988 you entered into a contract with a builder to add an extension to a property you own. The cost was due and payable when the work was completed in September 1988. When you calculate the indexation allowance you should treat the expenditure as incurred in September 1988.
What about part disposals?
If you make a disposal of part of an asset you own, you will only be able to deduct part of the costs of that asset in working out your gain or loss. See What are part disposals?
Your indexation factor is multiplied by the part of the cost that can be deducted, not by the whole of the cost of the asset.
What about assets held at 31 March 1982?
If you
- owned an asset at 31 March 1982, or
- acquired an asset from your spouse in a no gain/no loss transfer after that date, and your spouse held the asset at 31 March 1982
the rules are modified for that asset.
Your indexation allowance is calculated on the greater of
- the total cost you or your spouse incurred up to 31 March 1982 on that asset (including its initial acquisition price), or
- the value of that asset at 31 March 1982.
Unless you, or your spouse, have made an election for rebasing to 31 March 1982 to apply to all your disposals. If you have made a rebasing election, indexation allowance is calculated on the value of the asset at 31 March 1982. Whether you have made a rebasing election or not, the indexation allowance is calculated by reference to inflation since March 1982.
You calculate separately indexation allowances on any relevant expenditure incurred after 31 March 1982 that is allowable in working out your gains.
Example
You bought an asset in 1979 for £20,000. At 31 March 1982 it was worth £15,000. You should calculate your indexation allowance by multiplying £20,000 by the indexation factor unless you have made a rebasing election, in which case you should multiply £15,000 by the indexation factor.
What about disposals of pooled shares or securities?
Shares of the same class in the same company acquired before 6 April 1998 are treated as a single asset, the share pool.
Indexation allowance for disposals after 31 March 1998
You work out the indexation allowance by multiplying the amount you spent by the indexation factor. All of the indexation factors you will need are included in the table below.
For example, if you incurred expenditure in June 1989, look across the Month columns to find June and then look down the column until you find the row for 1989. Your indexation factor for June 1989 will be 0.409.
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