Key facts
- Indexation allowance is available only to companies — not individuals or trusts.
- It increases the allowable cost by the rise in the Retail Prices Index (RPI) from acquisition to disposal.
- The allowance was frozen at December 2017 — no further indexation accrues after that date.
- Indexation allowance can reduce a gain to nil but cannot create or increase a loss.
- For assets held before 31 March 1982, indexation runs from March 1982 (using the rebased cost).
What Is the Indexation Allowance?
The indexation allowance adjusts the allowable cost of an asset for inflation, as measured by the Retail Prices Index (RPI). It ensures that companies are not taxed on gains that merely reflect rising prices rather than real economic profit.[1]
The allowance applies only to companies subject to Corporation Tax on chargeable gains. Individuals, trusts, and personal representatives do not receive indexation allowance.
Frozen at December 2017: The indexation allowance was frozen by Finance Act 2018. For disposals on or after 1 January 2018, the indexation factor is calculated using the RPI for December 2017 as the final month, regardless of when the disposal actually occurs.[1]
How to Calculate the Indexation Allowance
The calculation involves three steps:[2]
- Identify the RPI for the month of acquisition (or March 1982 if rebasing applies)
- Identify the RPI for December 2017 (which is 278.1)
- Calculate the indexation factor: (RPI Dec 2017 − RPI acquisition) ÷ RPI acquisition, rounded to three decimal places
Indexation allowance = Allowable cost × Indexation factor
Worked Example
ABC Ltd bought a commercial property in April 2005 for £200,000. The RPI for April 2005 is 191.6. The company sells the property in September 2025 for £450,000 with £10,000 in disposal costs.
| Step | Calculation | Amount |
|---|---|---|
| Disposal proceeds | £450,000 | |
| Less: acquisition cost | −£200,000 | |
| Less: disposal costs | −£10,000 | |
| Unindexed gain | £240,000 | |
| Indexation factor | (278.1 − 191.6) ÷ 191.6 | 0.451 |
| Indexation allowance | £200,000 × 0.451 | £90,200 |
| Indexed gain | £240,000 − £90,200 | £149,800 |
The £149,800 indexed gain is then included in the company’s total taxable profits for Corporation Tax purposes.
Indexation on Enhancement Expenditure
If the company incurred enhancement expenditure on the asset, a separate indexation calculation is performed for each item of expenditure, using the RPI for the month in which that expenditure was incurred:[2]
| Expenditure | Date | RPI | Factor | Indexation |
|---|---|---|---|---|
| Purchase: £200,000 | Apr 2005 | 191.6 | 0.451 | £90,200 |
| Extension: £50,000 | Jun 2012 | 241.8 | 0.150 | £7,500 |
| Total indexation allowance | £97,700 |
Restriction: Cannot Create or Increase a Loss
The indexation allowance can reduce a gain to nil, but it cannot:[1]
- Turn a gain into a loss
- Increase an existing loss
If the unindexed computation produces a gain of £5,000 but the indexation allowance would be £8,000, the allowance is restricted to £5,000 and the result is a gain of nil (not a loss of £3,000).
If the unindexed computation already produces a loss, no indexation allowance is given at all.
Pre-1982 Assets
For assets held on 31 March 1982, the indexation factor is calculated from March 1982 (RPI 79.44), not from the original date of acquisition. This is consistent with the rebasing rules — the 31 March 1982 market value replaces the original cost, and indexation runs from the same date.[2]
Key RPI Values
| Month | RPI | Significance |
|---|---|---|
| March 1982 | 79.44 | Rebasing date for pre-1982 assets |
| April 1998 | 162.6 | Start of taper relief era (individuals) |
| January 2010 | 217.9 | Reference point |
| January 2015 | 255.4 | Reference point |
| December 2017 | 278.1 | Frozen date for indexation |
Tip: HMRC publishes a full table of RPI figures and ready-made indexation factors. You can use these to look up the factor for any month of acquisition without needing to calculate it manually.[3]
Why Individuals Do Not Get Indexation
Individuals lost the indexation allowance from 6 April 2008, when it was replaced by a flat-rate CGT system (initially 18%, later split into 10%/20% and now 18%/24%). The rationale was simplification — lower headline rates were intended to compensate for the loss of indexation relief.
Frequently Asked Questions
What is the indexation allowance?
The indexation allowance increases the base cost of an asset held by a company to account for inflation. It uses the Retail Prices Index to adjust the acquisition cost upwards, reducing the chargeable gain. It has been available since 1982 but was frozen at December 2017 values.
Why was the indexation allowance frozen?
The UK Government froze the indexation allowance at December 2017 as part of reforms to the Corporation Tax treatment of chargeable gains. This means companies no longer receive inflation relief for price increases occurring after December 2017.
Can individuals claim indexation allowance?
No. Indexation allowance is only available to companies. Individuals lost access to indexation allowance in 2008, when it was replaced by a flat-rate CGT system. There is no equivalent inflation adjustment for individual CGT calculations.
Can the indexation allowance create a loss?
No. The indexation allowance can reduce a gain to nil, but it cannot turn a gain into a loss or increase an existing loss. If the indexed cost exceeds the disposal proceeds, the indexation is restricted so the gain is simply nil.
Further Reading
- Assets Acquired Before 1982 — how rebasing interacts with indexation
- How to Calculate a Capital Gain — the overall CGT computation framework
- CGT on Shares — indexation in the context of share disposals by companies
- Allowable Costs & Deductions — what costs feed into the indexation calculation
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