Tax and your investments

1  2  3  4  5  6  7  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  29   

10. Indexation

Please note that the below is just for reference, as indexation and taper relief were abolished in April 2008.

The Indexation allowance used to reduce the taxable gain on an investment by increasing its base cost. It did this by applying a percentage uplift to the base cost, which increased according to the length of time that you had held the shares. The amount of the uplift was pegged to inflation rates in the years which you have held the shares.

• Shares bought 31st March 1982

  The base cost was fixed regardless of actual cost. So even if you bought shares in 1976, its base cost would have been the 1982 figure. To find out what that figure was, ask your accountant who will have tables.

• Shares bought 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.

• Shares bought after 5th April 1998

  There is no indexation allowance, but you may may have been able to get taper relief instead (before the rules changed).

» 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 0.283.
• 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.

The adjusted base cost is therefore £2,566 rather than £2,000, which reduces your gain from £3,000 to £2,434.

There are three 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.

1. Keeping it legal 2. How HMRC treats your investment income 3. Keeping records 4. The basis of dividend income 5. Dividend income 6. Interest income 7. Interest on Treasury Stock 8. Capital gains tax basics 9. Base cost 10. Indexation 11. Taper relief 12. Indexation and taper relief - together! 13. Date of acquisition 14. Disposal proceeds 15. Disposal of a holding with a history 16. Takeovers 17. Bonus/scrip issues 18. Share splits 19. Buybacks 20. Rights issues 21. Share options 22. Beneficiaries and minors 23. Calculating your CGT liability 24. Using your annual CGT exemption 25. Transfers between spouses 26. ISAs 27. Delaying capital gains 28. Other tips to reduce CGT liability 29. Conclusion