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HMRC internal manual

Capital Gains Manual

Indexation: from 6/4/88 example: indexation allowance

This example illustrates the freezing of indexation allowance for disposals made on or after 6 April 1998, except for disposals made by companies within the charge to Corporation Tax.

In June 1987 Miss D buys an investment property for £80,000. In July 1998 she has an extension built onto the property at a cost of £20,000. Then in September 1999 she sells the property for £180,000 less costs of £2,000.

  Disposal proceeds 180,000    
LESS Costs of disposal 2,000    
LESS Cost of acquisition 80,000    
  Enhancement expenditure 20,000    
Unindexed gain 78,000      
(Indexation allowance is calculated to April 1998)        
LESS Indexation 80,000 at 0.596 47,680  
    20,000 at nil -  
Indexed gain   30,320    

There is no indexation allowance on the enhancement expenditure because it was incurred after 31 March 1998.

Additionally taper relief, see CG17895+, may be due in respect of the period of ownership from 6 April 1998 to September 1999 but the calculation is not included in this example. Any taper relief would further reduce the indexed gain.