Tx notes fa22 Final

1.1.
 
Calculation of gains and losses for companies 
1.2. The indexation allowance 
Indexation allowance (IA) uses the rise in the retail price index (RPI) as an allowance for the 
e
ff
ects of inflation. It ceased to be available from December 2017. To calculate the IA for each 
asset use:
Relevant indexation factor 
×
 capital expenditure
The indexation factor is applied to the 
acquisition cost
(including incidental costs of 
acquisition) and 
enhancement costs
separately (as these will be incurred on a di
ff
erent 
date).
You should use the indexation factor provided in the question for the movement from the 
month of expenditure to the month of disposal (or December 2017 if earlier).
The IA is deducted from the gain but 
cannot create or increase a loss
.
Unused indexation allowance is wasted.
£
Disposal proceeds (or market value)
X
Less: incidental costs of disposal
(X)
Net proceeds
X
Less: allowable costs
(X)
Unindexed gain
X
Less: indexation allowance
(X)
Chargeable gain
X

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If the RPI falls, rather than increases, between the date of acquisition and the date of disposal, 
then the indexation allowance is £Nil. 
 
Example 1
 
 
A company bought an asset on 6 June 1987 at a cost of £20,000. 
Enhancement expenditure of £6,000 was incurred on 16 August 1991. 
The asset is sold for £100,000 on 2 October 2023. 
Incidental costs of sale are £1,000.