Indexation on realised gain

[SYABC]

I am confused as to when to apply and when not to apply indexation.

For example, a share bought at £100 one year ago and sold at £110. Assuming 5% inflation rate, the taxable realised gain is £110-£100x1.05=£5.

What happen if the share is sold at £103?

Is the taxable realised gain/loss
1) £103-£100 =£3
or
2) £103-£100x1.05 = -£2

thank you

 

[mugono]

Hi

I'll give it a go

Using the figures in your example:

If you originally bought an asset at 100 and sold it at 103 and there was an indexation rate of 5% then

1. The sell price exceeds the purchase price so there's a 'gain'
2. Allowing for indexation tax is payable only on amounts in excess of the indexed amount ( ie 100x1.05 = 105)
3. Because this exceeds 103 no tax is payable
4. Profit is therefore 3 ('net' of tax)

 

[SYABC]

Hi

I'll give it a go

Using the figures in your example:

If you originally bought an asset at 100 and sold it at 103 and there was an indexation rate of 5% then

1. The sell price exceeds the purchase price so there's a 'gain'
2. Allowing for indexation tax is payable only on amounts in excess of the indexed amount ( ie 100x1.05 = 105)
3. Because this exceeds 103 no tax is payable
4. Profit is therefore 3 ('net' of tax)

My understanding now is:

if the price is £104, you get profit of £4 net of tax
if the price is £106, you get profit of £1x0.8=£0.08 net of tax

so you actually get less profit when price is £106?

 

[mugono]

Your first point is correct

In your second example, 1 * 0.8 = 0.8 right... Your 'solution' can't be right... Isn't it 5 + 0.8 = 5.8

 

[SYABC]

how do you get 5 + 0.8 ?

This is my calculation:

£106 - £100x1.05 = £1

I get this by applying indexation

so am I correct?

 

[mugono]

The calculation you have written essentially works out the chargeable gain on which tax is paid.

Anything in excess of £105 incurrs tax. Your calculation ignores the fact that the first £5 is also profit (albeit tax free).

Does that make sense...

 

[SYABC]

it makes sense now, thanks mugono!