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HMRC internal manual

Capital Gains Manual

Small capital distributions: computation: - 1982 holding

If the shares are held in an 1982 holding TCGA92/S57 applies to adjust the indexation allowance due on a later sale of the shares, see CG17360+. No adjustment is required at the time of the capital distribution. When the shares are sold you calculate the indexation allowance due in the following way.

STEP 1Calculate indexation allowance on the allowable cost of the shares before any adjustment for the capital distribution.

STEP 2Compute the indexation allowance due on the capital distribution from the date of the distribution to the date the shares were sold.

STEP 3Subtract the indexation allowance due on the capital distribution, Step 2, from the total indexation allowance due, Step 1.


  • March 1980 Mrs Hudson buys 1,000 £1 ordinary shares in Holmes Holdings Ltd.
  • September 1991 Holmes Holdings Ltd reduces its share capital to 50p by paying 50p in cash.
  • December 1992 Mrs Hudson sells her entire holding of 50p shares for £115,000.The market value of the £1 ordinary shares are agreed as follows:-

31 March 1982 £45 per share

September 1991 £110 per share.

Mrs Hudson has made an election under TCGA92/S35 (5) out of the kink test.

The capital distribution in September 1991 is small and is not treated as a disposal.

When Mrs Hudson sells the shares in December 1992 you compute the indexation allowance due as follows.

STEP 1Compute the full amount of indexation allowance without any adjustment for the capital distribution. March 1982-December 1992 = 0.752

£45,000 x 0.752 = £33,840.

STEP 2Compute the indexation allowance due on the capital distribution from September 1991 to December 1992 - 0.034

£5,000 x 0.034 = £170.

STEP 3Reduce £33,840 by £170 = £33,670.


  Disposal proceeds     115,000  
less Cost   45,000    
minus Capital distribution   5,000 40,000  
    Unindexed gain   75,000  
less Indexation   33,840    
minus Capital distribution   170 33,670  
    Chargeable gain   41,330  

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.