Indexation allowance

When calculating capital gains up to April 1998, relief is given in the form of an indexation allowance. This allowance takes into account inflation based on the Retail Prices Index (RPI).

From November 1993 the indexation allowance can only reduce an unindexed gain to nil. Prior to this it could create or increase a capital loss.

With effect from 6th April 1998 taper relief has replaced the indexation allowance. (This applies to individuals only. Indexation allowance is still relevant for capital disposals made by companies.)

The indexation allowance is calculated by multiplying the cost of the asset, any acquisition costs, and any improvement costs, by the increase in the RPI from the month in which the expenditure was incurred to April 1998. (For sales before April 1998, the increase in the RPI up to the month of sale is used.) If expenditure is incurred at different times, the indexation allowance is calculated separately on each item of expenditure.

The increase in the RPI is calculated by the formula:

Key:

RD - RPI for the later of the month of disposal or April 1998.
RI - RPI for the later of the month expenditure incurred or March 1982.

For example, the increase in the RPI from March 1982 to April 1998 is:

The RPI is rounded to three decimal places. If the RPI is calculated as a negative figure the increase is taken as nil.

Indexation allowance table

The following table shows the retail price indexation allowance figures from 1982 to 1998.