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September 2nd 2022

Will the capital gains indexation allowance make a comeback?

Indexation allowance used to shield UK taxpayers from paying tax on chargeable gains that were attributed to general price inflation.

In the current, very inflationary environment could the allowance make a comeback?

The relief against capital gains was abolished for individuals from April 2008; and for companies it was "frozen" from January 2018 (i.e. no allowance is given for inflationary gains from that point onwards).

In times when inflation has been low, inflationary gains often account for a relatively small part of a chargeable gain; when annual inflation is running at 10%, it may however be a much bigger factor.

Let's look at a simple example:

Mary bought a rental property a few years ago for £50k, which she recently sold for £80k. The chargeable gain is £30k. Of this gain, (using official inflation indices) £20k is attributed to general price inflation.

With no indexation allowance available under current tax rules, the chargeable gain is £30k - which could be taxed at a rate as high as 28% (the highest rate applicable to disposals of residential property) - a tax bill of £8,400.

With indexation allowance restored, however, the chargeable gain could be reduced to as little as £10k - resulting in a capital gains tax bill for Mary of no more than £2,800.

The above examples are somewhat simplified but the point remains - right now a lot of taxpayers are going to face bigger tax bills when disposing of chargeable assets simply because inflation is driving up asset prices significantly.

As the Tory leadership election campaign drags on, one wonders how long it might be before one or other contender floats the idea of bringing back indexation allowance.

Speak to us about how to plan for and manage your tax affairs. Contact us today.


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