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HMRC internal manual

Capital Gains Manual

Indexation: 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 For disposals on or after April 2008 indexation was withdrawn altogether for non-corporate entities.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.