CG17200 - Introduction and computation: indexation: introduction
Inflation and CGT
From 1965 to 1982 the basic principle was that Capital Gains Tax was charged on the actual gain in pounds sterling from the date of acquisition, or 6 April 1965 if later. In Secretan v Hart, 45TC701, as long ago as 1969, the taxpayer claimed that Capital Gains Tax is a tax on capital gains, which meant gains in true money terms. Therefore the price actually paid by him should be reassessed to take into account the fall in value of the pound. The answer of the Court was simply that the legislation, in particular the rules for deductions in what is now TCGA92/S38, see CG15150+, did not make any provision of this kind. The heavy inflation of the 1970s increased the pressure to introduce a relief for inflation. Therefore in 1982 the `indexation allowance' was introduced. In this guidance the indexation allowance is often referred to simply as `indexation', particularly in computations.
The basic principle of indexation is that a deduction is made in the computation in respect of inflation. This deduction is calculated by multiplying the `relevant allowable expenditure', see CG17240, by the percentage increase in the Retail Price Index from the date of acquisition of the asset (or in some cases a later date) to the date of disposal. For disposals made on or after 6 April 1998 the rules for Indexation differed for entities which were companies within the charge to Corporation Tax and those which were not. For disposals made by entities which were not companies within the charge to Corporation Tax 'indexation' was frozen for disposals made after 5 April 1998 until 5 April 2008 . For disposals in this period the percentage increase remained that used for 6 April 1998. For disposals on or after April 2008 indexation was withdrawn altogether for non-corporate entities.
For companies within the charge to Corporation Tax Indexation was frozen from December 2017. For all assets held before 1 January 2018, but disposed of on or after this date, the percentage increase remains that used for December 2017.
The percentage increase is known as the `indexation factor’. CG17290 explains where you can find the RPI figures and indexation factors.
History
FA82/S86, FA82/S87, FA82/S88, FA82/S89, FA82/SCH13
FA85
FA88 - REBASING
FA94
FA98 INDEXATION FROZEN
DEFERRED GAINS
EXAMPLES
FA08 - CGT SIMPLIFICATION - WITHDRAWAL OF INDEXATION
DEFERRED GAINS
FA82/S86, FA82/S87, FA82/S88, FA82/S89, FA82/SCH13
FA82/S86 - FA82/S89 and FA82/SCH13 introduced a deduction, known as the `indexation allowance', to be made in computing gains. The allowance was given on the allowable expenditure. This would normally be the cost of the asset, or if appropriate, see CG15500, the value on 6 April 1965.
For assets acquired after March 1982, the chargeable gain becomes approximately the `real' gain, that is, the gain after making an allowance for inflation. But relief was severely restricted, see CG17540, by three particular provisions:-
- For assets acquired before April 1982, only the inflationary element from March 1982, was taken into account for indexation, although indexation was based on the original cost.
- Indexation could not create or increase a loss.
- No relief was due for the first twelve months of ownership.
FA85
FA85/S68 and FA85/SCH19 amended and extended the original FA1982 provisions. The twelve month rule was repealed. Indexation could now increase or create losses, so that indexation was due in respect of all disposals. In addition, where the asset was held at 31 March 1982 the allowance could be computed by reference to the value at that time. As a result the legislation enabled the full inflationary element of the gains since March 1982 to be taken into account, see CG17570.
FA88 - REBASING
The next step was in FA88/S96 which broadly provided that where assets were held on 31 March 1982 the gain would normally be computed by reference to the value on that date. See CG16700+. This is known as `rebasing'.
FA94
FA94/S93 and FA94/SCH12 introduced restrictions on the extent to which indexation allowance can create or increase a loss. These rules operate in respect of disposals of assets on or after 30 November 1993 See CG17700+. However, there are special rules for dealing with indexation following no gain/no loss transfers of an asset (see CG12705) before 30 November 1993.
FA98 INDEXATION FROZEN
For disposals between 6 April 1998 and 5 April 2008 FA98/S122 froze indexation allowance, except for disposals made by companies within the charge to Corporation Tax. In practice this means that for disposals on or after 6 April 1998 the indexation factor runs to April 1998 for Capital Gains Tax purposes regardless of when the disposal is made in the period up to 5 April 2008.
Indexation allowance is not available in respect of assets acquired, or other relevant allowable expenditure incurred, after 31 March 1998, except for assets acquired by companies within the charge to Corporation Tax.
See CG51623 for an explanation of freezing indexation for share pools.
Indexation continued as before for companies within the charge to Corporation Tax.
DEFERRED GAINS
Freezing of indexation allowance does not change the treatment of any gain that is computed on a disposal or a deemed disposal before 6 April 1998 but postponed so that it is treated as accruing on or after 6 April 1998. Indexation allowance will be computed to the date of the disposal or deemed disposal and not to the date of accrual.
Where the date of the disposal or deemed disposal is on or after 6 April 1998 indexation allowance will be computed to April 1998, except in the case of companies within the charge to Corporation Tax where where indexation was not frozen until 1 January 2018.
The most common examples of postponed gains include
- reorganisations involving qualifying corporate bonds, see CG53709
- business asset roll-over relief where the replacement asset is a depreciating asset, see CG60295.
EXAMPLES
The example at CG17318 illustrates the freezing of indexation allowance. The example at CG17319 illustrates the freezing of indexation allowance where a gain is postponed.
FA08 - CGT SIMPLIFICATION - WITHDRAWAL OF INDEXATION
FA08/S8 and FA08/SCH2 simplified CGT. This included a single rate of CGT applicable for disposals on or after 6 April 2008. As part of CGT Simplification, indexation is no longer available.
CGT Simplification does not apply to companies who pay corporation tax on their chargeable gains. FA08 introduced TCGA92/S52A, which provides that indexation only applies for the purposes of corporation tax.
DEFERRED GAINS
The withdrawal of indexation allowance with effect from 6 April 2008 does not change the treatment of any gain on an asset owned before April 1998 that is computed on a disposal or a deemed disposal before 6 April 2008 but postponed or deferred so that it is treated as accruing on or after that date. Indexation allowance will be computed to 5 April 1998 (or the date of the disposal or deemed disposal if before 5 April 1998) and not to the date of accrual.
Basic computations
TCGA92/S52A
As part of CGT Simplification, indexation is no longer available in respect of disposals made on or after 6 April 2008.
However CGT Simplification does not apply to companies who pay corporation tax on their chargeable gains. From 6 April 2008 TCGA92/S52A provides that indexation will only apply for the purposes of corporation tax.
The guidance in this section of the manual will therefore be applicable to both CGT and corporation tax on chargeable gains for disposals by companies made on or before 5 April 2008 but only to corporation tax on chargeable gains for disposals by companies made on or after 6 April 2008.
The allowance is normally the amount arrived at by applying the indexation factor to each item of expenditure (or value), within TCGA92/S38 (1)(a) and (b), incurred or treated as incurred by the person disposing of the asset. Although in practice computations often treat the allowance as an addition to cost, in strictness the allowance is deducted from the gain in order to arrive at the chargeable gain, and computations sent to taxpayers or their agents should be laid out in the correct form.
Shares
Shares and other assets which form part of a pool are subject to different bases of computation. Please refer to the relevant guidance in the section beginning at CG51500 when dealing with such assets.