Our website uses cookies to enhance the visitor experience (what's a cookieCookies are small text files that are stored on your computer when you visit a website. They are mainly used as a way of improving the website functionalities or to provide more advanced statistical data.). Are you happy for us to use cookies during your visits?
Please note: continuing without making a choice equates to giving us your consent, which you can withdraw at any time via our cookies policy page.

How to Bank Your Indexation Allowance

Newsletter issue - March 08.

Several important capital gains tax reliefs are being withdrawn at the end of this tax year on 5 April 2008, including indexation allowance which compensates for the effect of inflation on the value of your assets. In return for this simplification, capital gains made from 6 April 2008 will be taxed at a flat rate of 18% instead of your marginal tax rate of 20% or 40%. In spite of this tax rate reduction those who have held assets for ten years or more could pay more tax on a disposal after 6 April 2008, but it does depend on how much the asset originally cost.


You are about to sell some land you've held since April 1982. It has not been used for a business purpose, so the taper relief is 40% for a non-business asset. You also get indexation allowance to compensate for the effect of inflation from April 1982 to April 1998. We assume you have already used your annual exemption for 2007/08, so all the gain you make is taxed at your highest margin rate.

Sale Agreed:Before 6 April 2008After 5 April 2008
Proceeds of sale1,200,0001,200,000
Less cost in April 1982(200,000)(200,000)
Indexation allowance at 1.006(201,200)-
Gain before taper relief798,8001,000,000
Taper relief at 40%(319,520)-
Gain after taper relief479,2801,000,000
Capital gains tax at 40% or 18%191,712180,000

By delaying the sale you save tax of £11,712 (£191,712 - £180,000), but you lose the benefit of both the indexation allowance and the taper relief.

You can bank the indexation allowance by transferring the land to your spouse before 6 April 2008, who then sells it in the new tax year to take advantage of the lower tax rate. A transfer to a spouse or civil partner is treated as a no gain/ no loss transaction for capital gains tax purposes, so no tax is due on the inter-spouse transaction. The deemed cost of the land for your spouse includes the indexation allowance.


Transfer to spouse in 2007/08Sale by spouse in 2008/09
Deemed and actual proceeds of sale401,2001,200,000
Less cost(200,000)(401,200)
Indexation allowance at 1.006(201,200)-
Taxable gain:NIL798,800
Cost of land for spouse:401,200-
CGT payable at 40% or 18%NIL143,784

By making the inter-spouse transfer and selling in the later tax year you and your spouse pay tax of £143,784 on the gain rather than £180,000, a further saving of £36,216.

Points to note:

  • This indexation saving trick only works when transferring the asset to a spouse or civil partner, a transfer to a sibling or unmarried partner will not work.
  • The spousal transfer must be legal and complete. Land must be transferred by a deed, and shares must be recorded against the new owner's name on the company's share register.
  • Complete the transfer to your spouse well before the asset is advertised for sale. If the sale negotiations start before the spousal transfer is done, the Taxman will say the transfer is an inserted step to reduce the tax payable, and will ignore the spouse transfer for tax purposes.
  • Check whether the final tax saving is worthwhile before making the transfer. An asset with a low cost, or low base value in March 1982, will not attract much indexation.
  • Auto enrolment icon

    Auto Enrolment

    Workplace pensions rules are changing.
    Be prepared for auto enrolment, see how we
    can help and read up on our guidance notes.


  • Cloud accounting icon

    Cloud Accounting

    With our online bookkeeping packages, our support
    services are only a click away.
    Discover cloud accountancy solutions to bring your finances up to date.

  • Pay less tax icon

    Pay Less Tax

    Our experienced tax advisors can help you
    make the most of your options to reduce
    your tax bills.


  • Make more profit icon

    Make More Profit

    From business plans to management accounts,
    our business services will ensure you are in
    control of your business finances.


  • Source finance icon

    Source Finance

    Our experienced partners can guide you
    in getting the finance you need to make
    your business grow. Read our guides or
    contact us for a free consultation.

  • Outsource your payroll icon

    Outsource Your Payroll

    Let us handle payroll compliance for your
    business. We can deal with HMRC on your
    behalf, and take the stress out of RTI.