Remember that companies can still benefit from an indexation allowance
9th May 2025
Posted in Articles by Andrew Marr
Many people see indexation allowances as a thing of the past (to the extent they see them at all!). To recap, indexation allowances have been available at various points in time to enhance the tax base cost of an asset which is disposed of. The indexation allowance was computed based on the retail price index at particular points in time and its role was to act as a mechanism to avoid the taxation of purely inflationary gains. Controversially, this allowance was completely scrapped for individuals from 6 April 2008 but indexation is still available for companies up to 1 January 2018.
Although most tax software will ‘remember’ to include an indexation allowance in capital gains tax calculations, this point should also be remembered for more manual tax calculations which are undertaken. For example, this point is relevant when calculating the capital gain on residential property disposals by non-resident companies.
Example
IOM Ltd is an Isle of Man company which disposed of a residential property for £1.5m on 9 May 2025. The property was acquired for £700,000 on 31 July 2006 and it had a market value of £1.1m on 5 April 2015. There are three ways of calculating the gain in this scenario, with the aim being to use the methodology which gives the best result. I consider these different methods below.
Method 1 – Use 5 April 2015 market value as the base cost
£1.5m – £1.1m = £0.4m
But don’t forget about indexation relief!
Here we can take indexation from April 2015 to December 2017 (which is 0.078) to get another £85,800 of base cost deduction.
This will reduce the gain from £400,000 to £314,200.
Method 2 – Time apportion the whole gain to the period after 5 April 2015
£1.5m – £0.7m = £0.8m.
Indexation from July 2006 to December 2017 is 0.401 which gives £280,700 of indexation allowance.
This will reduce the gain from £800,000 to £519,300.
Time apportioning this to the period after 5 April 2015 (3,687 days/6,857 days) will leave £279,227 of taxable gain.
Method 3 – Take the whole gain
From above this would be £519,300.
We would therefore decide to use ‘Method 2’ here, but that is only because of the impact of indexation.
Forbes Dawson view
Indexation is still very relevant for companies where assets were held before January 2018 and the longer the period of ownership before this date then the more relevant it will be. The example above is also a good reminder that the default option of simply using the 5 April 2015 market value may not always be the best option. As a rule of thumb Method 2 will be more likely to be applicable when there has been a long period of ownership before 6 April 2015 but where use of the 2015 market value still gives rise to a significant gain. Anyway, as December 2017 recedes into history we should try not to forget about indexation allowances!
