Indexation allowance – Chargeable gains

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    atab
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    Hi tutor,

    If for example freehold office building:
    – was sold for 286,716
    – Incidental cost of disposal 3,840
    – original purchase of office building 81,000
    – incidental cost of acquisition 3,200
    – enhancement expenditure 43,000

    How would you calculated indexation allowance if you are not given the Retail Price Index please as I could not quite understand the formula?


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    Tax Tutor
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    You must be given the RPI to be able to compute the Indexation Allowance (IA)!!
    I suspect you are looking at an example where an individual has made a disposal rather than a company. Only companies get IA NOT individuals!! For how a company computes a gain and IA is calculated see OT Course Notes page 91 and for individuals page 116.


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    atab
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    Yes I know it is only for companies and the question I am working is for companies…I also always thought before that RPI is given to us until I came across this question where the RPI was not given….this is the question:

    On 30 April 2011 Hawk Ltd sold a freehold office building for £286,716. It has been purchased on 2 July 1990 for £81,000 and had been extended during May 2002 for £43,000. Hawk Ltd incurred legal fees of £3,200 in connection with the purchase and £3,840 in connection with the sale. The office building has always been used by Hawk Ltd for business purposes. Calculate the corporation tax liability.

    No RPI was given in the question, however when I looked at the answer the indexation allowance was calculated like this:
    (234.4 – 126.8) / 126.8 = 0.849 (cost)
    (234.4 – 176.2) / 176.2 = 0.330 (enhancement)

    I can’t understand where the figures came from :(


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    Tax Tutor
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    I repeat that you must be given the RPI’s to be able to compute the IA – does the BPP material give you the RPI’s with the other tax rates and allowances information and expect you to therefore refer to the table when needed rather than print the RPI’s at the end of each queston?
    I assume you understand the basis of the IA calculation that 234.4 is the RPI for the month of disposal (April 2011), 126.8 is the RPI for month of acquisition (July 1990) and 176.2 is the RPI for month that enhancement expenditure incurred (May 2002) and we express the Indexation factor to 3 dp. Hope this helps


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    atab
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    Yes, I understand the formula I just can’t seem to understand where the figures came from. I am using Emile Woolf and there is no table to refer to for RPI :( I guess it must have been a mistake in the question…thanks for your help!

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