Have you bought all your Christmas presents yet? Here’s a suggestion for an ideal present for your spouse – an indexation allowance.
On 9 October, Alistair Darling announced radical changes to the rules for Capital Gains Tax (CGT). These changes take effect from 5 April 2008 and include the abolition of the indexation allowance.
The indexation allowance was introduced to prevent taxpayers from paying CGT on the inflationary growth in the value of their assets. It worked by allowing you to increase the “base cost” of an asset for CGT purposes by a factor derived from the difference between the Retail Price Index on the day you bought it, and the RPI on the day you sold it. Indexation lasted from March 1982 until April 1998, when it was “frozen” for assets owned by individuals or trustees, and taper relief (also to be abolished) was introduced to replace it.
Although it was frozen in 1998, the indexation allowance remains a valuable relief for those who still own assets they owned in the period from 1982 to 1998. For example, if you bought some shares for £10,000 in April 1982, and you sold them today, the indexation allowance for the period from April 1982 to April 1998 would more than double the “cost” you could deduct from the resulting capital gain – in fact, you could deduct a total of £20,060.
If you sell those shares after 5 April 2008, however, you will only be able to deduct the original cost of £10,000, because the indexation allowance will be abolished then.
That is why a gift of those shares to your spouse (or civil partner) would be such a thoughtful Christmas present. Gifts between spouses are deemed to pass at a price that produces “no gain, no loss”. Because your “cost” for CGT purposes currently includes the indexation allowance, if you were to give those shares to your spouse, the deemed sale proceeds (and thus the “cost” she can deduct on a future sale) would include the indexation allowance. In the case of the shares referred to above, she would have a cost of £20,060, and when she eventually sells them (before or after 5 April 2008), that will be what she can deduct from the sale proceeds.
Unfortunately, as the law stands at present, if you owned the shares (or any other asset) before 31 March 1982, this trick will not work. Without going into the technicalities, because your spouse will be deemed to have acquired the asset at the time you did, the same rules would apply to him/her and no indexation allowance would be due on a sale after 5 April 2008.
Rather surprisingly, HM Revenue and Customs have let it be known that they intend to change the law to remedy this, so that the indexation allowance can be “crystallised” by way of a gift between spouses even if the asset was owned before March 1982. At the time of writing this, it is only a rumour so don’t rely on it until there is a formal announcement, but for assets acquired after 31 March 1982 and before April 1998, you can use such a gift to “lock in” (as Gordon Brown is fond of saying) the indexation allowance.
Of course, as an allowance for inflation, the indexation allowance gets less valuable as your date of acquisition approaches April 1998, so it may not be worth the trouble to gift an asset you acquired in, say, 1997. As a rule of thumb, assets acquired in 1992 would only attract an indexation allowance of about 20%, reducing to nil if they were acquired in April 1998.
That is why the indexation allowance makes such an ideal gift – if you don’t like your Marks and Spencer sweater, you can take it back to the store and get the money back, but only the indexation allowance will give you double the cost!
Have you bought all your Christmas presents yet? Here’s a suggestion for an ideal present for your spouse – an indexation allowance.
On 9 October, Alistair Darling announced radical changes to the rules for Capital Gains Tax (CGT). These changes take effect from 5 April 2008 and include the abolition of the indexation allowance.
The indexation allowance was introduced to prevent taxpayers from paying CGT on the inflationary growth in the value of their assets. It worked by allowing you to increase the “base cost” of an asset for CGT purposes by a factor derived from the difference between the Retail Price Index on the day you bought it, and the RPI on the day you sold it. Indexation lasted from March 1982 until April 1998, when it was “frozen” for assets owned by individuals or trustees, and taper relief (also to be abolished) was introduced to replace it.
Although it was
... Shared from Tax Insider: Indexation Allowance – The Ideal Stocking Filler
FAQs
The allowance is calculated by multiplying the base cost of the asset by the change in the retail price index from the date when such expenditure was incurred to the date of disposal (or deemed disposal). The purpose of indexation allowance is to eliminate the effect of inflation in the chargeable gains calculation.
When did the indexation allowance stop? ›
For individuals, indexation allowance was frozen in 1998 and then eliminated in 2008. Essentially, the indexation allowance currently allows companies or organisations to include the effects of inflation and claim tax relief when calculating any chargeable gains that they make.
Can indexation allowance create a loss? ›
Please note that the indexation allowance cannot create or increase a capital loss.
Is there an indexation allowance on capital gains? ›
The tax on other assets is reduced from 20% to 12.5% with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated.
How do you calculate indexation of shares? ›
To apply indexation on equity shares, investors need to calculate the actual cost of acquisition on it. It is calculated by arriving at the lowest of the asset and highest cost of the asset based on the fair market value of the underlying.
What is the indexation rule? ›
In simple terms, indexation helps adjust the purchase cost of a property for inflation, effectively increasing the cost of the asset and reducing the taxable capital gains. Without this benefit, the tax payable on capital gains could be significantly higher, especially for real estate assets with lower appreciation.
What is indexation factor? ›
Key Takeaways. Indexation means adjusting a price, wage, or other value based on changes in another price or composite indicator of prices. Indexation can be done to adjust for the effects of inflation, cost of living, or input prices over time. It can adjust for different prices and costs in different geographic areas ...
What is indexation relief? ›
The indexation benefit allowed taxpayers to adjust the acquisition cost for inflation before computing capital gains, reducing their tax liability. The government issues the Cost Inflation Index (CII) for this purpose.
When did indexation start? ›
Indexation was applied on 1 June 2024 at the rate of 4.7%. Once legislation passes, indexation will be retrospectively changed to 4%. For more information about backdated indexation changes for 1 June 2023 and 1 June 2024 and how these changes will benefit you, visit HELP Indexation Credit Estimator.
How do you benefit from indexation? ›
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax. With the help of indexation, you will be able to lower your long-term capital gains, which brings down your taxable income.
Investing in retirement accounts eliminates capital gains taxes on your portfolio. You can buy and sell stocks, bonds and other assets without triggering capital gains taxes. Withdrawals from Traditional IRA, 401(k) and similar accounts may lead to ordinary income taxes.
Can indexation be negative? ›
Theoretically, it might be possible to have negative indexation if a country has a long-term period of negative inflation i.e. deflation.
Who gets indexation allowance? ›
What does Indexation allowance mean? An allowance applicable to corporation tax liabilities in respect of chargeable gains, which seeks to compensate the taxpayer for the effects of inflation. On a disposal by a company, indexation allowance is calculated up to the month of disposal.
Why was indexation removed? ›
The removal of indexation in Budget 2024 is expected to raise taxable gains on property sales, leading to higher tax liabilities. This change could dampen investor sentiment, potentially decrease property prices, and investors might shift their investment preferences.
How do I calculate indexation allowance? ›
Indexation allowance is calculated by applying the formula (RD — RI) ÷ RI (expressed as a decimal and rounded to the nearest third decimal place except for shares acquired after 31 March 1985) to each item of allowable expenditure.
What is indexation benefit in shares? ›
Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. A higher purchase price means lesser profits, which effectively means a lower tax. With the help of indexation, you will be able to lower your long-term capital gains, which brings down your taxable income.
Is indexation benefit available on shares for fy 23 24? ›
However, it is important to note that the benefit of indexation is not available for long-term capital gains on equity investments. Long-term capital gains upto Rs. 1 lakh are exempted from tax. However, if the LTCG exceeds this threshold, then such gains are taxable at a @10% (plus surcharge and cess) tax rate.
What is the indexation method of capital gains? ›
Indexation Method
This approach adjusts the purchase price for inflation for assets bought before September 1999, effectively reducing the capital gain. Consider you bought a property in January 1990 for $200,000 and sold it in March 2020 for $700,000.
Is indexation allowed on unlisted shares? ›
1. Long-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for more than 24 months or two years, any gain from the sale is categorised as a Long-Term Capital Gain (LTCG). LTCG earned from unlisted stocks is taxed at 20% with indexation.
