capital gains tax indexation

Mar 31, 2007 1 Replies

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Please does anyone know how to work out indexation allowance for periods within the March 1982-April 1998 pool (eg May 1988 to Jan

1990). When I 'phone the tax office they say just to subtract the two indexation allowances from the table on page CGN16. However, my mathematical logic suggests you have to add 1 to each factor, divide one by the other and subtract 1.

The example on page CGN23 gives the correct answer by my methodology. I find it odd that the people I have spoken to in the tax office say that the footnote on page CGN23 (half way down page) is wrong and you just subtract the two factors.

This is the first time I have done a CGT calculation, so I am somewhat confused by this inconsistancy.

The pool calculation on page CGN23 is unnecessarily complicated.

Instead of indexing the May 1988 shares up to a notional value in Jan 90 (when the additional shares were bought) and then indexing the combined pool up to their Apr 98 value, it could, and arguably should, have been done as follows, avoiding the need to compute the special factor of 0.125, which as you correctly observe is 1.531/1.361-1:

Batch 1, 2000 shares worth £9000 in May 88, allowance factor 0.531. Batch 2, 4000 shares worth £20000 in Jan 90, allowance factor 0.361.

Hence the 6000 shares have a combined indexed value of £40999 in Apr 98, this being 1.531x£9000 + 1.361x£20k, which corresponds to within a £1 rounding error to their figure of £41k given on page CGN23.

If 600 shares were sold after Apr 98 (it doesn't matter how long after, since that's when indexation stopped), their indexed value is obviously

600/6000 (i.e. a tenth) of £41k, and so £4100 should be deducted from the disposal proceeds of £6000 to give the chargeable gain of £1900. It's much easier and clearer to deduct the indexed value of the acquisition cost directly, than first to deduct the unindexed cost and then to deduct the difference between indexed and unindexed cost.

Obviously deducting X and then deducting Y-X gives the same answer as just deducting Y.

capital gains tax indexation

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