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Click here to view the Retail Prices Index
Indexation allowance gives relief for inflation. It was replaced from 6/4/98 onwards by taper relief. Relief is computed by taking the Retail Prices Index (RPI) for the months of acquisition and disposal in the following formula:
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allowable expenditure x |
RD - RI ---------- RI |
RD = RPI in the month of disposal or April 98, if earlier.
RI = RPI in the month of acquisition or March 82, if later.
The allowable expenditure is the amount paid for the asset plus any incidental costs of acquisition.
For example, an asset acquired in January 1990 for £10,000 and sold in December 1997
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10,000 x |
160.0 - 119.5 ------------------ 119.5 |
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10,000 x |
0.339 |
= £3,390 |
Note that the result of the formula is nearly always rounded to three decimal places before completing the sum. In this case (160.0 - 119.5) / 119.5 is actually 0.3389121338912. There is an exception to this rule that applies to indexation of an FA85 share pool (s104 holding).
2 - Assets acquired before 1/4/1982
3 - Assets sold after 5/4/1998
4 - Sample Calculation for Indexation on a Share Pool
Indexation allowance cannot create or augment a loss. Therefore, if the asset is sold for less than the purchase price, no indexation allowance will arise. If there is a gain but the indexation allowance is greater than the gain, the gain is reduced to nil but cannot be turned into a loss.
Indexation allowance will be applied to the higher of the original purchase price plus the incidental costs of acquisition or the market value at 31/3/82.
Indexation allowance will be computed up to April 1998. Thereafter, relief is given in the form of taper relief.
Sample Calculation including Enhancement Expenditure
The taxpayer acquires a house in January 1987 for £60,000, pays for an extension in April 1992 costing £30,000 and sells the house in September 1998 for £180,000. There were estate agents fees of £2,700 and legal fees of £500 on disposal.
There were legal fees of £300 on acquisition.
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Sale proceeds Less costs of disposal Less allowable costs Less indexation on purchase (0.626) Less indexation on extension (0.171)
Gain |
180,000 -3,200 -90,300 -37,560 -5,130 ----------- 43,810 |
RI in January 1987 = 100.0 [(162.6 - 100.0) / 100.0 = 0.626]
RI in April 1992 = 138.8 [(162.6 - 138.8) / 138.8 = 0.171]
RD in April 1998 = 162.6
Shares acquired between 1/4/82 and 5/4/98 were pooled in what was termed an FA85 Share Pool but is now called a s104 Holding! The system basically applied indexation each time that an operative event occurred (shares are purchased or sold). For example the taxpayer buys 1,000 XYZ Ltd shares in January 1987 for £6,000 and buys another 400 shares in April 1992 for £3,000.
Shares Indexed Unindexed
|
Jan 87 Purchase Indexation to Apr 92 Apr 92 Purchase
Pool Value at Apr 92 Indexation to Apr 98
Pool Value at 5/4/98 |
1,000
400 -------- 1,400
-------- 1,400 |
6,000.00 2,328.00 3,000.00 -------------- 11,328.00 1,942.41 -------------- 13,270.41 |
6,000.00
3,000.00 ------------ 9,000.00
------------ 9,000.00 |
Note that unlike the previous example, the indexation factor is not rounded to three decimal places. The indexation to April 92 is computed as 6000 x (138.8 - 100.0) / 100.0 = 2328.00. The indexation to April 98 is computed as 11328 x (162.6 - 138.3) / 138.8 = 1942.41.