Taxes Consolidation Act 1997 section 556

Adjustment of allowable expenditure by reference to consumer price index

Section 556 provides for indexation relief, which adjusts the base cost of an asset for inflation when computing a chargeable gain for capital gains tax purposes.

• When computing a chargeable gain, the cost of acquisition and any enhancement expenditure may be multiplied by a statutory indexation factor derived from the Consumer Price Index, but only for expenditure incurred up to and including 2002 — for 2003 and later years the multiplier is 1.000, meaning indexation relief has effectively been abolished.
• Assets held on 6 April 1974 (the commencement date for capital gains tax) are deemed to have been sold and immediately reacquired at market value on that date, so that the indexed base cost runs from 1974–75 onwards; expenditure incurred within 12 months before the date of disposal cannot be indexed.
• Indexation cannot be used to increase an actual gain or an actual loss, nor can it convert an actual gain into a loss or an actual loss into a gain — where such a conversion would otherwise arise, the disposal is treated as giving rise to no gain and no loss.
• Where compensation or insurance proceeds are applied in restoring an asset and a claim is made under section 536(1)(a), the compensation is deducted from the restoration expenditure rather than from the original cost, so that the full original cost remains available for indexation from the date it was incurred.