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CGT - Bank or Lose Indexation Allowances

Dear Sir / Madam

Bank or Lose your Indexation Allowance

Following the Chancellor's Pre- Budget announcement on Capital Gains Tax reform, Indexation Allowance will be abolished from 6 April 2008 and any Indexation that has accrued on an asset purchased between 31 March 1982 and 5 April 1998 will be lost.

One possible method of "banking" any indexation allowance (IA) that would otherwise be lost on 6 April 2008 is if one spouse were to transfer an asset to the other before the rules change.

For example: If say a husband bought an asset on 1 April 1982 for £50,000 (i.e. after 31 March 1982) he could give the asset to his wife today (i.e. before 6 April 2008) and her adjusted cost on any future sale would be the husbands original cost plus Indexation allowance of £52,350, giving an overall cost deductible from any sale proceeds of £102,350.

Failure to make use of the indexation allowance in this way would result in a base cost of only £50,000 as a cost against any future sale proceeds (i.e. after 6 April 2008).

As a consequence of the changes in the rules HMRC have confirmed that "Indexation Allowance will not be stripped out of post 6 April 2008 disposals" where such transfers are correctly executed between spouses.

There are other methods that can be used in order to "bank" any indexation allowance, but the inter-spouse transfer has been used above to illustrate the tax savings available as this is the easiest way to achieve the saving.

If you wish to discuss the above or any other matters that may be of concern then please do not hesitate to contact Paul Kemp on 0151 7025619 or paul.kemp@ercacc.co.uk .

Regards

ERC Chartered Accountants
Suite 26, Century Buildings, Brunswick Business Park, Liverpool, L3 4BJ.

Notes:
Indexation Allowance is an allowance for inflation and is HMRC's way of recognising that costs naturally increase over time.
indexation will only apply to assets bought between 1 April 1082 and 5 April 1998.
The above changes in the rules do not effect Limited Companies