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Dear Tax Tutor,
Please can you help with a question from the video 19.3 Takeovers – Example 4 in relation to indexation allowance.
In this example why did we not calculate the indexation allowance by deducting the indexation cost from the original cost (3,393-2,500) £893.
I am confused on this point as it seems like in Example 2 the figures included for indexation allowance deductable were (28,278 – 14,167) £14,111. In Example 3 the figure for indexation allowance deductable was (9,955 – 5,000) £4,955.
In Example 4 are we not deducting the £2500 twice by including the figure of £3,393? I have tried to construct the share pool for Example 4 but am confused on this point.
Thank you for you help.
Many thanks,
Mike
Hi Mike – you will see in the answer my comment –
“In reality the same method of apportioning the indexed cost column for the A Ltd shares would be applied and re-indexation of the indexed cost column would occur at the time of the takeover or to December 2017”
That exercise takes a lot more time and effort – as you appear to have discovered! That is why I have shown you the much quicker and easier route accepted by the examiners and I would ask you to look at this as a separate exercise to what we did in the earlier part of the chapter where we constructed the share pool.
We are NOT deducting the cost of £2,500 twice! The entire preference shareholding is being sold – if you had shown a share pool you would have a cost of £2.500 and an indexed cost of £5.893 – the indexation allowance would then of course be the difference between those figures ie £3,393.
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