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Indexation Allowance on Corporate Capital Gains
Indexation Allowance is a tax relief that helps companies account for inflation when calculating capital gains for Corporation Tax purposes. It reduces the taxable gain on asset disposals by adjusting the purchase cost for inflation between acquisition and disposal, meaning yo...
Introduction
Indexation Allowance is a tax relief that helps companies account for inflation when calculating capital gains for Corporation Tax purposes. It reduces the taxable gain on asset disposals by adjusting the purchase cost for inflation between acquisition and disposal, meaning your company pays less tax on gains that merely reflect rising prices rather than real increases in value.
What is Indexation Allowance?
Indexation Allowance is a mechanism that adjusts the cost of an asset upwards to reflect inflation over the period your company owned it. When your company sells (or 'disposes of') an asset such as property, land, shares, or equipment, any profit is normally subject to Corporation Tax as a chargeable gain. However, some of that apparent profit may simply be due to general price inflation rather than a genuine increase in the asset's real value.
The allowance works by increasing the original purchase price of the asset using official inflation indices. This higher adjusted cost is then deducted from the sale price, resulting in a smaller taxable gain and therefore less Corporation Tax to pay.
Who Can Claim Indexation Allowance?
Indexation Allowance applies to companies and organisations that pay Corporation Tax. This includes:
- Limited companies
- Community interest companies
- Housing associations
- Clubs and societies
- Trade associations
- Co-operatives
Sole traders and individuals do not use Indexation Allowance. If you operate as a sole trader or dispose of personal assets, different capital gains rules apply, and you would pay Capital Gains Tax rather than Corporation Tax.
How Indexation Allowance Reduces Your Tax Bill
When your company sells an asset for more than it cost, the basic calculation would be:
Chargeable gain = Sale price − Purchase price
Indexation Allowance changes this to:
Chargeable gain = Sale price − (Purchase price + Indexation Allowance)
By increasing the purchase price to account for inflation, the taxable gain becomes smaller. Your company then pays Corporation Tax only on the inflation-adjusted gain.
The allowance can reduce a gain to zero, but it cannot create or increase a loss. If the indexed cost exceeds the sale price, the gain is simply treated as nil rather than becoming a deductible loss.
How to Calculate Indexation Allowance
The calculation uses the Retail Prices Index (RPI), which is the government's official measure of inflation. HMRC publishes indexation factors that correspond to each month from when the asset was acquired to when it was disposed of.
The formula is:
Indexation Allowance = Cost of asset × Indexation factor
The indexation factor is calculated as:
Indexation factor = (RPI at disposal − RPI at acquisition) ÷ RPI at acquisition
HMRC rounds the factor to three decimal places.
Example Calculation
If your company bought a commercial property in January 2010 for £200,000 and sold it in June 2017:
1. Find the RPI for January 2010 (acquisition month)
2. Find the RPI for June 2017 (disposal month)
3. Calculate the indexation factor using the formula above
4. Multiply £200,000 by the indexation factor
5. Add this allowance to the £200,000 original cost
6. Deduct the indexed cost from the sale proceeds to find the taxable gain
Rather than calculating manually, you can use the published indexation factors available from HMRC, which show the factor for any combination of acquisition and disposal dates.
Where to Find Indexation Rates
HMRC publishes official Indexation Allowance rates and factors on GOV.UK. These tables cover periods from 2014 onwards, showing the indexation factor for each month.
For assets acquired before 2014, you can find historical indexation rates on the National Archives website, which maintains older HMRC guidance and rate tables.
The tables are organised by acquisition date (when your company bought the asset) and disposal date (when you sold it), making it straightforward to look up the correct factor for your calculation.
Important Changes and Frozen Allowances
The rules around Indexation Allowance have changed over time. While the allowance remains available for assets acquired and held before certain dates, subsequent changes may have frozen or restricted its application.
Always check the current position when calculating gains for the tax year 2025/26, as the allowance may be frozen at a particular date for disposals occurring now, meaning inflation after that freeze date is not factored into the relief.
Record Keeping Requirements
To claim Indexation Allowance correctly, your company must maintain records showing:
- The date the asset was acquired
- The original purchase cost
- Any enhancement expenditure (improvements) and when this was incurred
- The date of disposal
- The sale proceeds
Enhancement expenditure can also attract its own indexation from the date the expenditure was incurred to the disposal date, further reducing your taxable gain.
Keep these records for at least six years after the accounting period in which the disposal occurred, as HMRC may ask to see your calculations during a compliance check.
Indexation Allowance vs Capital Gains Tax
It's important not to confuse Indexation Allowance (which applies to companies paying Corporation Tax) with the rules for Capital Gains Tax (which applies to individuals, sole traders, and partners).
Individuals disposing of assets do not receive Indexation Allowance. Instead, they may benefit from the annual Capital Gains Tax exemption and different relief provisions. If you operate both as a sole trader and through a limited company, different rules apply to each structure.
Sources
This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.