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I am quite confused how to calculate chargeable gain when indexation is used.
Free Notes show two different kind of methods how to calculate Indexation Allowance
in Chapter 19. Please check Answers pages 199 – 201.
Examples 2 and 3:
Indexation allowance = Indexed Cost – Cost.
Examples 1, 4 and 5:
Indexation allowance = Indexation Factor x Cost.So in order to get Chargeable gain:
*sometimes you subtract: real cost and then difference between indexed cost & real cost
and
*sometimes you subtract real cost and then total indexed costs.Why Indexation allowance is calculated differently in these examples?
Thanks.
The normal rule for indexation allowance is that you apply a 3 decimal place indexaion factor to the allowable cost of the asset being sold.
The only time we do not do this is when dealing with shares when we reindex the share pool without reference to rounding the indexation factor. However when dealing with takeovers the examiner has made life easier for us (though not quite technically correct) by giving us in the question indexation factors to apply, hence the way the examples are given in the OT notes.
Not sure if you’ve listened to relevant lecture where (I think!?) I mentioned this point. Hope this helps
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