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Please could you help me with F6 UK September 16 Q 21:
Kat Ltd sold a freehold factory on 31 May 2015 for £364,000, which resulted in a chargeable gain of £120,700. The factory was purchased on 1 October 2003 for £138,600, and further capital improvements were immediately made at a cost of £23,400 during the month of purchase. Further improvements to the factory were made during the month of
disposal. The relevant retail prices indexes (RPIs) are as follows:
October 2003 182·6
May 2015 258·0
What amount of indexation allowance will have been deducted in calculating the chargeable gain of £120,700 on the disposal of Kat Ltd’s factory?
A: (138,600 + 23,400) x 0·413 (258·0 – 182·6)/182·6 = £66,906
What is the 0.413 please?
The 0.413 is the indexation allowance. (258 -182.6) / 182.6 = 0.412924. Rounded to 3 places (you must round to 3 places except for shares) is 0.413.
This is representing the gain from inflation i.e. the amount the price of the factory would have increased by if it only increased at the same rate as RPI.