Glossary · UK
What is Indexation Allowance?
A historic relief, frozen since 1998 for individuals and 2018 for companies, that reduced a capital gain by the effect of inflation over the holding period.
Full Definition
Indexation allowance was a relief that reduced a chargeable gain for Capital Gains Tax purposes by an amount reflecting inflation (based on the Retail Prices Index) between the date an asset was acquired and the date it was disposed of, on the basis that only the "real" gain above inflation should be taxed. For individuals, trustees, and personal representatives, indexation allowance was frozen with effect from April 1998 and then abolished entirely for disposals from 6 April 2008 onwards, replaced by a flat Capital Gains Tax rate structure with reliefs such as the annual exempt amount instead. For companies within the charge to Corporation Tax, indexation allowance survived longer but was frozen at its December 2017 value and then withdrawn for disposals made on or after 1 January 2018 -- meaning a company can still claim indexation allowance for the period of ownership up to December 2017, but no further inflationary relief accrues for any period after that date. Indexation allowance can never turn a gain into a loss or increase an existing loss; it can only reduce or eliminate a chargeable gain, and calculating it correctly for older assets (particularly company-owned property or shares bought well before 1998 or 2018) still occasionally arises in practice and should be checked against gov.uk's indexation allowance tables for the relevant month and year of acquisition.