indexation

Indexation is an allowance which reduces the taxable gain on an investment by increasing its base cost. It does this by applying a percentage uplift to the acquisition cost which increases according to the length of time that you have held the investment. The amount of the uplift is pegged to inflation rates in the years which you have held the investment. The tax saving arises because the higher the adjusted base cost of the investment, the lower the chargeable gain will be when you dispose of it. The indexation allowance varies according to when you bought the asset:

1. Shares acquired before 31st March 1982
   The base cost can be taken either as their cost when acquired or their value on 31st March 1982. You can either:
   a) elect for all your holdings dating from before 31st March 1982 to beassessed on one or the other of these bases. You may already have donethis; if you have not but wish to, you must do it within 1 year of the 31st January after the end of the tax year in which you made the first sale ofany such shares you hold; or
   b) treat each such holding individually, choosing which basis to use as andwhen you make a sale.
   Then calculate your indexation by looking up the applicable percentagefigure in tables, and applying it to your base cost. That gives you a figureto add to the base cost and thus reduce your gain.

2. Shares acquired between 31 March 1982 and 5 April 1998
   Calculate your indexation by looking up the applicable percentage figure in tables, and applying it to your base cost. That gives you a figure to add to the base cost and thus reduce your gain.

3. Shares acquired after 5th April 1998
   There is no indexation allowance, but you may be able to get taper relief instead.

Example:

• In June 1990 you bought 1,000 Plastex plc shares in a transaction which cost £2,000 in total.
• You sold the shares in March 1998 for £5,000. Before indexation, your gain was £3,000.
• Looking at the indexation tables gives you a number 0.269.
• Multiply this by the base cost and you get an amount which can be added to base cost to decrease the amount of your gain.

On the basis of these figures, the Indexation Allowance would apply as follows:

• Base cost - June 1990 £2,000
• Indexation - June 1990 to March 1998 0.269
• Uplift in base cost 0.269 x 2,000 = £538
• Adjusted cost £2,538

The adjusted base cost would therefore be £2,538 rather than £2,000, which reduces your gain from £3,000 to £2,462.

There are four important points to note about indexation:

1. It can only reduce a gain. It cannot create a loss. So if you sold your shares for £2,200, you would not be able to use the 'loss' of £338. Indexation would just reduce your gain to zero.
2. It only applies to purchases made before 5th April 1998. For purchases after that date, you have to rely on taper relief.
3. Indexation can be used in combination with taper relief in certain circumstances.
4. Capital Gains Tax can be complex and if any doubt contact your tax adviser/accountant.