In accordance with the Capital Gains Tax Reform indexation will not be calculated on gains made on or after 6th April 2008 expect in the circumstance where the asset or shareholding has been transferred from a spouse.
Indexation allowance uses the retail prices index (RPI) to take inflation into account when computing the gain on disposal. The allowance applied from April 1982 to April 1998. It is replaced by taper relief from April 1998 onwards. Assets held prior to this date are given indexation allowance to April 1998, whereas limited company gains continue to calculate indexation on all gains.
Indexation allowance cannot create or increment a capital loss (from 30/11/93 onwards). If the indexation allowance is greater than the gain, the gain is reduced to Nil.
Indexation allowance is computed by multiplying the acquisition amount by the indexation factor.
The indexation factor is rounded to 3 decimal places (except for operative events on share pools between April 1985 and April 1998 where no rounding is applied) and is computed from the following formula where:
RD is the RPI at the month of disposal
RI is the RPI at the date of acquisition (or March 82 if later):
RD - RI
RI
Where the asset was acquired prior to 31/3/82 the indexation factor is applied to the greater of the original acquisition value and the market value at 31/3/82.
An asset acquired on 1/1/90 and sold on 1/1/99 will be indexed as follows:
162.2 - 119.5 = 0.357. (162.2 is the RPI at April 1998 and 119.5 the RPI at January 1990)
119.5
If the asset was acquired for £10,000 the indexation allowance will be £3,570. The gain will be computed based on the disposal proceeds less the acquisition amount less the indexation allowance.
Unlike individuals and trusts indexation continues to apply for limited company gains from April 1998 onwards.