Capital Gains Tax Indexation Allowance - The Current CGT Allowances
- Adil Akhtar
- Jun 24
- 13 min read
The Audio Summary of the Key Points of the Article:
Understanding Capital Gains Tax and the Indexation Allowance in 2025-26
What Is Capital Gains Tax and Why Does Indexation Matter?
Let’s kick things off with the basics. Capital Gains Tax (CGT) is what you pay when you sell or “dispose” of an asset—like property, shares, or even cryptocurrency—and make a profit. The “gain” is the difference between what you paid for the asset and what you sold it for, minus allowable costs like fees or improvements. But here’s the kicker: not all gains are taxed, and that’s where things like the indexation allowance used to come into play. Indexation was a way to adjust the original cost of an asset for inflation, reducing the taxable gain. Sounds like a sweet deal, right? Well, hold onto your hat because things have changed, and understanding these changes is crucial for keeping more of your hard-earned cash in 2025.
Is the Indexation Allowance Still Available in 2025?
Here’s the bad news first: if you’re an individual taxpayer, the indexation allowance is no longer available. It was scrapped for individuals back in 2008, replaced briefly by taper relief, which itself got the boot. For companies, though, it’s a different story—at least partially. The indexation allowance for corporations was frozen on 31 December 2017, meaning you can still apply it to gains up to that date, but not beyond. According to HMRC, this freeze ensures that companies calculate chargeable gains using inflation adjustments only up to December 2017. So, if you’re a business owner running a company, you might still benefit from indexation for older assets, but don’t expect it to cover recent inflation spikes.
Why Was Indexation Allowance Phased Out?
Now, let’s dig into why this allowance disappeared for individuals. Back in the 1980s, when inflation was running wild (think 15-25% in some years), the indexation allowance was introduced to ensure you weren’t taxed on gains that were just inflation keeping up with rising prices. Fast forward to 1998, Labour Chancellor Gordon Brown replaced it with taper relief to encourage long-term investment. By 2008, taper relief was axed too, and indexation was gone for good for individuals, as the government argued it complicated the tax system. For companies, the freeze in 2017 was part of a broader push to simplify corporation tax while still taxing real gains. The logic? Lower inflation rates in recent years (hovering around 2% in 2025) made indexation less critical, but critics argue it penalises long-term asset holders.
How Does the Absence of Indexation Affect You?
Picture this: you’re a small business owner, let’s call you Priya, who bought a commercial property in 2010 for £200,000. In 2025, you sell it for £350,000. Without indexation, your taxable gain is £150,000 (minus any allowable costs). If indexation were still around, you could adjust the £200,000 for inflation, potentially reducing your gain significantly. In 2025, with no indexation for individuals, you’re stuck paying CGT on the full £150,000 (after your £3,000 annual exempt amount, of course). For companies, the story’s slightly better—if Priya’s business was a limited company, she could apply indexation up to December 2017, potentially shaving thousands off the taxable gain. This discrepancy means sole traders and individuals face a tougher tax hit than corporations on older assets.
CGT Rates and Allowances in 2025/26
Let’s break down the numbers. For the 2025/26 tax year, the CGT rates and allowances are critical to understanding your tax bill. Here’s a quick table to keep things clear:
Taxpayer Type | Asset Type | CGT Rate (2025/26) | Annual Exempt Amount |
Basic-rate taxpayer | Non-residential assets | 18% | £3,000 |
Higher/additional-rate taxpayer | Non-residential assets | 24% | £3,000 |
Basic-rate taxpayer | Residential property | 18% | £3,000 |
Higher/additional-rate taxpayer | Residential property | 24% | £3,000 |
Carried interest | All taxpayers | 32% | £3,000 |
Business Asset Disposal Relief | Qualifying businesses | 14% (from 6 April 2025) | £3,000 |
Trusts | All assets | 24% | £1,500 |
Source: GOV.UK, updated 16 May 2025
The annual exempt amount (£3,000 for individuals, £1,500 for trusts) is your tax-free allowance for gains. Anything above this is taxed at the rates above, depending on your income tax band. For example, if your taxable income plus gains stays below £37,700 (the basic-rate band for 2025/26), you pay 18% on non-residential gains. Cross that threshold, and it’s 24%.
How Do You Calculate CGT Without Indexation?
Let’s walk through a real-world example. Meet Ewan, a freelance graphic designer in Manchester. In 2025, he sells shares he bought for £10,000 in 2018, now worth £25,000. Here’s how his CGT bill shakes out:
Calculate the gain: £25,000 (sale price) - £10,000 (purchase price) = £15,000.
Deduct allowable costs: Let’s say Ewan paid £500 in broker fees. So, £15,000 - £500 = £14,500.
Apply the annual exempt amount: £14,500 - £3,000 = £11,500 taxable gain.
Determine the tax rate: Ewan’s taxable income is £20,000, so his income plus gain (£20,000 + £11,500 = £31,500) is below the £37,700 basic-rate band. He pays 18% CGT.
Calculate the tax: £11,500 × 18% = £2,070.
Without indexation, Ewan’s taxed on the full £11,500 gain, even though some of that reflects inflation over seven years. If indexation were available, his original £10,000 cost could’ve been adjusted upward, reducing the taxable gain.
Why Does This Matter for Business Owners?
Now, if you’re running a small business, the absence of indexation for individuals hits harder. Say you’re a sole trader selling business assets—like machinery or a shop. You’re taxed on the full gain, no inflation adjustment. For limited companies, the frozen indexation allowance (up to December 2017) can still reduce gains on assets held before that date. For instance, a company selling a factory bought in 2005 could adjust its cost base using HMRC’s indexation factors up to 2017, potentially saving thousands. Check HMRC’s indexation allowance tables on GOV.UK for exact figures. This creates a tax planning opportunity for incorporated businesses but leaves sole traders and partnerships at a disadvantage.
Strategies to Minimise CGT and Navigating Corporate Indexation in 2025
How Can You Reduce Your CGT Bill Without Indexation?
So, you’ve sold an asset and now you’re staring down a hefty Capital Gains Tax (CGT) bill—ouch! Without the indexation allowance to cushion the blow for individuals, it’s all about smart planning to keep your tax liability as low as possible. The good news? There are still plenty of ways to reduce what you owe HMRC, whether you’re a landlord, investor, or small business owner. Let’s dive into some practical strategies, backed by the latest rules for the 2025/26 tax year, to help you keep more of your gains.
First, make full use of your annual exempt amount (£3,000 for individuals, £1,500 for trusts). This is your tax-free allowance, and it’s a no-brainer to apply it to your gains. If you’re married or in a civil partnership, consider transferring assets to your spouse before selling. Transfers between spouses are tax-free, and you can use both your allowances, doubling the tax-free amount to £6,000. For example, if Aisha and her husband Tariq sell shares worth £20,000 (with a £10,000 gain), splitting the sale equally lets them use both £3,000 allowances, reducing the taxable gain to £4,000.
Next, offset allowable losses. If you sold an asset at a loss (say, some crypto that tanked), you can deduct that loss from your gains before calculating CGT. Just make sure to report losses to HMRC within four years of the tax year they occurred. Also, consider timing your sales. If your income is close to the £37,700 basic-rate band threshold, spreading sales over multiple tax years can keep your gains taxed at the lower 18% rate instead of 24%.
What Reliefs Can You Claim in 2025?
Now, let’s talk reliefs—they’re like tax loopholes, but totally legal! For business owners, Business Asset Disposal Relief (BADR) is a game-changer. As of 6 April 2025, qualifying disposals of business assets (like shares in your own company or sole trader assets) are taxed at just 14%, down from the standard 24%. To qualify, you must have owned the business for at least two years, and the relief is capped at a lifetime limit of £1 million in gains. Let’s say Priya, our small business owner from Part 1, sells her graphic design business for a £500,000 gain. With BADR, her CGT rate drops to 14%, saving her £50,000 compared to the standard 24% rate.
For property investors, Private Residence Relief (PRR) can wipe out CGT entirely if you’re selling your main home. But be careful! If you’ve let out part of your home or used it for business, you might only get partial relief. Another gem is Investors’ Relief, which also offers a 14% rate for external investors in unlisted companies, with a separate £1 million lifetime limit. Check GOV.UK for eligibility details, as these reliefs have strict conditions.
How Does Corporate Indexation Work in 2025?
Now, if you’re running a limited company, the frozen indexation allowance is still in play for assets acquired before 31 December 2017. This is a big deal for businesses holding long-term assets like property or machinery. The indexation allowance adjusts the original cost of an asset for inflation up to December 2017, using HMRC’s Retail Prices Index (RPI) factors. Let’s break it down with an example:
Meet Sanjay, who runs a small manufacturing company. In 2005, his company bought a warehouse for £300,000. In 2025, he sells it for £600,000. Here’s how indexation applies:
Base cost: £300,000.
Indexation factor: HMRC’s RPI factor from 2005 to December 2017 is, say, 1.35 (check exact figures on GOV.UK). So, £300,000 × 1.35 = £405,000 (indexed cost).
Gain calculation: £600,000 (sale price) - £405,000 (indexed cost) = £195,000.
Deduct allowable costs: Say, £10,000 in legal fees. Gain = £185,000.
Corporation tax: At the 2025/26 corporation tax rate of 25% (for profits over £250,000), Sanjay’s company owes £46,250 in tax.
Without indexation, the taxable gain would be £290,000 (£600,000 - £300,000 - £10,000), leading to a tax bill of £72,500. That’s a £26,250 saving! The catch? Indexation stops at 2017, so any inflation after that date doesn’t reduce your gain.
Here’s a table summarising key indexation factors for common acquisition years (approximate, based on HMRC data):
Year of Acquisition | Indexation Factor to Dec 2017 |
2000 | 1.52 |
2005 | 1.35 |
2010 | 1.20 |
2015 | 1.05 |
Source: HMRC Indexation Allowance Tables, updated 2025
What About Crypto and Other Modern Assets?
Here’s where things get tricky. Cryptoassets like Bitcoin are subject to CGT, and with no indexation for individuals, the tax hit can sting. Imagine Zara, a London-based freelancer who bought £5,000 of Bitcoin in 2020 and sold it for £30,000 in 2025. Her gain is £25,000, and after the £3,000 exemption, she’s taxed on £22,000. At 24% (as a higher-rate taxpayer), that’s £5,280 in CGT. To minimise this, Zara could sell in chunks over multiple years or offset losses from other crypto trades. HMRC’s crypto guidance on GOV.UK is crystal clear: every disposal (even swapping one crypto for another) is a taxable event, so keep meticulous records.
Are There Special Rules for Non-Domiciled Individuals?
Now, consider this: if you’re non-domiciled but UK-resident, CGT rules can get complex. Non-doms pay CGT on UK assets, but gains on foreign assets are only taxed if you “remit” the proceeds to the UK. From April 2025, the government’s new residence-based regime for non-doms (introduced in the Autumn Budget 2024) means you might qualify for a temporary 100% relief on foreign gains for the first two years of UK residence, but only if you haven’t been UK-resident in the last 10 years. This is a rare scenario most articles skip, but it’s critical for high-net-worth individuals with overseas investments. Always consult a tax advisor to navigate these rules.
How Can Small Business Owners Plan Ahead?
If you’re a sole trader or partnership, the lack of indexation means you need to get creative. One strategy is incorporating your business into a limited company. By transferring assets to a company, you might qualify for incorporation relief, which defers CGT until you sell the company’s shares. Plus, as we’ve seen, companies can still use the frozen indexation allowance for pre-2018 assets. Another tip? Max out your pension contributions. While pensions don’t directly reduce CGT, they lower your taxable income, potentially keeping your gains in the future.
Key Takeaways and Practical Tips for Managing Capital Gains Tax in 2025
Why Should You Care About CGT Planning in 2025?
Let’s face it, nobody loves paying taxes, but with a bit of planning, you can make sure HMRC doesn’t take more than its fair share. By now, you’ve got a solid grasp of how Capital Gains Tax (CGT) works and the role the indexation allowance (or lack thereof) plays in the UK. This final part pulls together the most critical points to help you navigate CGT in 2025, whether you’re selling a rental property, cashing in shares, or winding down a business. These takeaways are designed to be your go-to checklist for staying tax-savvy.
Summary of the Most Important Points
The indexation allowance is no longer available for individuals in 2025, having been scrapped in 2008, so you’re taxed on the full gain from asset sales, minus allowable costs and exemptions.
For companies, the indexation allowance is frozen at December 2017 levels, allowing inflation adjustments for assets acquired before that date, potentially reducing taxable gains significantly.
The CGT annual exempt amount for 2025/26 is £3,000 for individuals and £1,500 for trusts, letting you shield that amount of gains from tax each year.
CGT rates for individuals in 2025/26 are 18% for basic-rate taxpayers and 24% for higher/additional-rate taxpayers on most assets, with residential property also at 18% or 24% depending on your income band.
Business Asset Disposal Relief (BADR) offers a reduced CGT rate of 14% (from April 2025) on qualifying business disposals, capped at a £1 million lifetime limit, ideal for business owners.
Transferring assets to a spouse or civil partner is tax-free and can double your annual exempt amount to £6,000, a smart move for couples planning asset sales.
Allowable losses from other asset sales (like crypto or shares) can offset your gains, but you must report them to HMRC within four years to claim the relief.
Non-domiciled UK residents may benefit from a temporary 100% relief on foreign gains under the new 2025 residence-based regime, but only for the first two years if not recently UK-resident.
Incorporating a sole trader business into a limited company can defer CGT via incorporation relief and allow access to the frozen indexation allowance for pre-2018 assets.
Meticulous record-keeping is crucial, especially for cryptoassets, as every disposal is a taxable event, and HMRC expects detailed records to calculate gains accurately.
FAQs
Q1: **What is the difference between indexation allowance and taper relief for Capital Gains Tax in the UK?**
A1: The indexation allowance adjusted the cost of an asset for inflation to reduce taxable gains, while taper relief reduced the taxable gain based on how long an asset was held, encouraging long-term investment. Taper relief replaced indexation for individuals in 1998 but was abolished in 2008.
Q2: **Can trusts use the indexation allowance for CGT calculations?**
A2: Trusts cannot use the indexation allowance for CGT, as it was discontinued for individuals and trusts in 2008, but corporate trustees may benefit from the frozen indexation allowance if structured as a company.
Q3: **How does the indexation allowance impact CGT for assets inherited before 2017?**
A3: For inherited assets, the base cost for CGT is the market value at the date of death. For companies, indexation can be applied to this base cost up to December 2017 if the asset was acquired before that date.
Q4: **Are there any plans to reinstate the indexation allowance for individuals in the UK?**
A4: There are no confirmed plans to reinstate the indexation allowance for individuals, as recent government policy focuses on simplifying the CGT system.
Q5: **Does the indexation allowance apply to CGT on gifts of assets?**
A5: For companies, the indexation allowance can apply to the base cost of gifted assets up to December 2017, but individuals cannot use it for gifts, as they calculate gains based on market value at the time of the gift.
Q6: **How does inflation affect CGT liability without the indexation allowance?**
A6: Without indexation, inflation increases the nominal gain on an asset, leading to a higher CGT liability, as the original cost isn’t adjusted for rising prices.
Q7: **Can non-residents use the indexation allowance for UK property disposals?**
A7: Non-residents cannot use the indexation allowance for CGT on UK property, as it’s unavailable for individuals, but non-resident companies may apply it up to December 2017 for qualifying assets.
Q8: **What records are needed to calculate indexation for corporate CGT?**
A8: Companies need records of the asset’s purchase cost, acquisition date, disposal date, and any allowable expenses to apply the frozen indexation allowance accurately.
Q9: **Does the indexation allowance apply to CGT on employee share schemes?**
A9: The indexation allowance does not typically apply to employee share schemes for individuals, but companies disposing of such shares may use it up to December 2017.
Q10: **How does the indexation allowance interact with CGT deferral reliefs?**
A10: For companies, indexation can reduce the gain before applying deferral reliefs like rollover relief, but the frozen allowance only covers inflation up to December 2017.
Q11: **Can the indexation allowance be used for CGT on assets held in an ISA?**
A11: Gains from assets held in an ISA are exempt from CGT, so the indexation allowance is irrelevant for these investments.
Q12: **What happens to unused indexation allowance for companies?**
A12: There is no concept of “unused” indexation allowance; it’s applied automatically to adjust the base cost of qualifying assets up to December 2017 for corporate CGT.
Q13: **Does the indexation allowance apply to CGT on business goodwill?**
A13: For companies, indexation can apply to the cost of goodwill acquired before December 2017, reducing the taxable gain on its disposal.
Q14: **How does the indexation allowance affect CGT for partnerships?**
A14: Partnerships are treated as individuals for CGT, so they cannot use the indexation allowance, but a partner’s share of a corporate entity’s assets may benefit from it.
Q15: **Can indexation allowance reduce CGT on assets sold at a loss?**
A15: Indexation cannot create or increase a capital loss; it only adjusts the base cost to reduce taxable gains for companies up to December 2017.
Q16: **Is the indexation allowance available for CGT on overseas assets?**
A16: For UK-resident companies, indexation can apply to overseas assets acquired before December 2017, but individuals cannot use it for any assets.
Q17: **How does the indexation allowance affect CGT for charities?**
A17: Charities are generally exempt from CGT, so the indexation allowance is not applicable unless they operate through a taxable corporate structure.
Q18: **Can indexation allowance be applied retrospectively for past CGT calculations?**
A18: Companies can apply the frozen indexation allowance for assets disposed of after 2017 if acquired earlier, but individuals cannot claim it for disposals after 2008.
Q19: **Does the indexation allowance impact CGT on assets held in a pension fund?**
A19: Pension funds are exempt from CGT, so the indexation allowance does not apply to assets held within them.
Q20: **How does the indexation allowance affect CGT for assets split between multiple owners?**
A20: For companies, each owner’s share of an asset’s base cost is indexed separately up to December 2017, while individuals calculate their share of the gain without indexation.
About The Author:
Adil Akhtar, ACMA, CGMA, CEO and Chief Accountant of Pro Tax Accountant, is an esteemed tax blog writer with over 10 years of expertise in navigating complex tax matters. For more than three years, his insightful blogs have empowered UK taxpayers with clear, actionable advice. Leading Advantax Accountants as well, Adil blends technical prowess with a passion for demystifying finance, cementing his reputation as a trusted authority in tax education.
Email: adilacma@icloud.com
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