Question
How does the HMRC recommend an individual calculate the profit/loss on an investment when inflation is involved? I have spoken with them last year and they instructed not to include any inflation. So if an investment was bought for £10,000 in 1995 and is, say, £15,000 now, then the result would be that £5,000 uses up part the £10k CGT allowance if the investment was sold now (in tax year 10/11)? Surely not, as I've run through some calculators and it seems that £15k now is about £10k then and there hasn't been a profit/loss ?
Here's another example for sake of clarity which applies to me more directly:
Say, in 1990 about £30k was submitted in to various Equity Funds, and they reached their matury in 2001, 2002 and 2003 and were put in to a Sterling Deposit Fund, but have been in there since 2003. And the current value is maybe about £45k. How would I begin to calculate this? Would I have to track how much each of the funds cost when they were acquired, compare it to how much they were worth when they matured and were put in to the deposit fund? Or is there another, better way, that would mean no CGT is paid because due to inflation, obviously, this wouldn't saturate the current allowance?Answer
Once upon a time you could take inflation into account when calculating capital gains. This was achieved by increasing the purchase price by inflation up to the sale date, a system called 'indexation'.
However, this was abolished in April 1998 in favour of a system called 'taper relief'. Under taper relief the amount of gain subject to tax reduced (by up to 40% for personal assets and 75% for business assets) the longer you held the asset. Assets owned on 31 March 1998 could also benefit from indexation allowance up to that date provided they were sold before 6 April 2008.
Taper relief (and indexation to 31 March 1998) was scrapped from 6 April 2008 and replaced by a flat capital gains tax rate of 18%. So while there was no longer any provision to take account of inflation, the rate was much lower than in the past to compensate.
The introduction of an additional 28% capital gains tax rate from 23 June 2010 (for higher and top rate taxpayers) went somewhat against the spirit of the original move to a low flat rate, but as it's still less than the higher and top rates of tax there's not much room for complaint.
The big issue will be if the rate of capital gains tax rises in future, as without the reinstatement of some sort of inflationary provision it will start to look very unfair. But then I suppose taxes were never meant to be fair...
How does the HMRC recommend an individual calculate the profit/loss on an investment when inflation is involved? I have spoken with them last year and they instructed not to include any inflation. So if an investment was bought for £10,000 in 1995 and is, say, £15,000 now, then the result would be that £5,000 uses up part the £10k CGT allowance if the investment was sold now (in tax year 10/11)? Surely not, as I've run through some calculators and it seems that £15k now is about £10k then and there hasn't been a profit/loss ?
Here's another example for sake of clarity which applies to me more directly:
Say, in 1990 about £30k was submitted in to various Equity Funds, and they reached their matury in 2001, 2002 and 2003 and were put in to a Sterling Deposit Fund, but have been in there since 2003. And the current value is maybe about £45k. How would I begin to calculate this? Would I have to track how much each of the funds cost when they were acquired, compare it to how much they were worth when they matured and were put in to the deposit fund? Or is there another, better way, that would mean no CGT is paid because due to inflation, obviously, this wouldn't saturate the current allowance?Answer
Once upon a time you could take inflation into account when calculating capital gains. This was achieved by increasing the purchase price by inflation up to the sale date, a system called 'indexation'.
However, this was abolished in April 1998 in favour of a system called 'taper relief'. Under taper relief the amount of gain subject to tax reduced (by up to 40% for personal assets and 75% for business assets) the longer you held the asset. Assets owned on 31 March 1998 could also benefit from indexation allowance up to that date provided they were sold before 6 April 2008.
Taper relief (and indexation to 31 March 1998) was scrapped from 6 April 2008 and replaced by a flat capital gains tax rate of 18%. So while there was no longer any provision to take account of inflation, the rate was much lower than in the past to compensate.
The introduction of an additional 28% capital gains tax rate from 23 June 2010 (for higher and top rate taxpayers) went somewhat against the spirit of the original move to a low flat rate, but as it's still less than the higher and top rates of tax there's not much room for complaint.
The big issue will be if the rate of capital gains tax rises in future, as without the reinstatement of some sort of inflationary provision it will start to look very unfair. But then I suppose taxes were never meant to be fair...
Read this Q and A at http://www.candidmoney.com/questions/question439.aspx
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