556 Adjustment of allowable expenditure by reference to consumer price index

Summary

This section is designed to provide a measure of relief for capital gains which are attributable purely to inflation. It provides that, in computing the chargeable gain on the disposal of an asset, the cost of acquisition of the asset (and any other expenditure allowable in computing the gain) are to be indexed, that is, they are to be adjusted by applying to it a multiplier based on the All Items Consumer Price Index as compiled by the Central Statistics Office. However for years 2003 and following, this indexation has been abolished. For disposals occurring in the year of assessment 1997–98 and the year of assessment 2004 and subsequent years, the relevant multipliers are specified in subsections (5) and (6A) respectively. For disposals occurring between the years of assessment 1998–99 and 2003 inclusive, the relevant multipliers are prescribed by regulations. Where an asset was held on 6 April 1974, the market value of the asset as at that date is deemed to be the cost of acquisition and indexation is applied to this base “cost”.

Indexation is available to all taxpayers. It cannot, however, operate to create an artificial loss or to augment an actual monetary loss. Expenditure incurred within one year before the date of disposal of the asset cannot be indexed. There is also a restriction on the amount of indexation available on the disposal of development land (see section 651).

Details

Definitions

(1) “the consumer price index number” means the All Items Consumer Price Index Number compiled by the Central Statistics Office.

“the consumer price index number relevant to any year of assessment” means the index number at the mid-November before the start of the year of assessment. All index numbers are expressed to the same base, that is, that the index number at mid-November, 1968 is 100.

Indexation – general

(2)(a) In computing a chargeable gain on a disposal, each sum allowable under paragraphs (a) and (b) of section 552(1) as a deduction from the consideration for the disposal is adjusted for inflation by multiplying it by the figure (the “multiplier”) either specified in subsection (5) (which deals with disposals in the year of assessment 1997–98), determined under subsection (6) (which allows Revenue to make regulations prescribing the multipliers for each subsequent year of assessment up to and including the year of assessment 2003) or specified in subsection (6A) (which deals with disposals in the year of assessment 2004 and subsequent years). The Table included in subsection (6A) reflects that adjustments for inflation in 2003 and subsequent years have been abolished.

(2)(b) No adjustment for inflation is to be made in relation to allowable expenditure incurred within the 12 months ending on the date of disposal.

Assets held on 6 April, 1974

(3) For capital gains tax purposes all assets which are held on 6 April, 1974 (the commencement date for capital gains tax) are deemed to have been sold and immediately reacquired on that date at their market value. The object of the provision is to fix, in relation to such assets, market value at that date for the purposes of indexation.

Indexation cannot increase actual gain/loss or convert gain to loss or loss to gain

(4) Indexation (subsection (2)) and the application of market value at 6 April 1974 (subsection (3)) do not apply where their operation would increase an actual gain or convert an actual loss into a gain, or increase an actual loss or convert an actual gain into a loss. Where the indexation and market value rules would otherwise convert an actual loss into a gain or an actual gain into a loss, the transaction is treated as giving rise to no gain and no loss.

Multipliers for indexation

(5) The appropriate multipliers to be used in the case of any disposal made in the year 1997–98 are set out in tabular format in subsection (5). Assets acquired by the disponer before 6 April, 1974 are, in accordance with subsection (3), to be revalued on that date, so that multipliers are prescribed for deductible expenditure incurred (or deemed under subsection (3) to have been incurred) in the years of assessment 1974–75 to 1996–97 inclusive. Neither the cost price of an asset acquired in 1997–98, nor enhancement expenditure incurred in 1997–98, is to be increased for deduction against the consideration for a disposal in that year. In effect, indexation does not apply to deductible expenditure incurred in the year of assessment in which the disposal occurs or, as provided in subsection (2)(b), within the period of 12 months ending on the date of the disposal.

(6) The multipliers for the years of assessment 1998–99 to 2003 inclusive are prescribed by the Revenue Commissioners by regulations made annually. The multipliers for the years of assessment 1998–99 to 2003 inclusive are the quotients (rounded up to 3 decimal places) obtained by dividing the consumer price index number relevant to the year of assessment in which the disposal is made by the consumer price index number relevant to the year of assessment in which the expenditure was incurred.

(6A) The appropriate multipliers to be used in the case of any disposal made in the year of assessment 2004 and subsequent years are set out in tabular format in subsection (6A). The provisions laid out at subsection (5) above also apply to this subsection.

Laying of regulations before Dáil Éireann

(7) The standard requirement for the laying of regulations before Dáil Éireann is set out.

Indexation where compensation money used to restore asset

(8) Any compensation or insurance money which under section 536(1)(a) is to be deducted from the allowable expenditure in computing a gain on the disposal of an asset is to be deducted from the amount spent in restoring the asset before applying indexation to that amount. In effect, this means that for indexation purposes the whole of the original cost of the asset is to be indexed.

[Section 536(1)(a) allows a person to claim that the receipt of a capital sum as compensation for damage to assets which are not lost or destroyed is not to be a disposal of that asset in whole or in part. It is a condition of the relief that the amount received be applied in restoring the asset (or be so applied except for a part which is not required for that purpose and which is small as compared with the whole amount).]

Market value on 6 April, 1974 is net of grants

(9) Where the market value of an asset at 6 April, 1974 is to be used in the computation of a gain, that value is to be reduced by the amount of any grants received from any government, statutory body or public or local authority in respect of the acquisition of the asset. Thus, indexation applies only to the net of grant amount.

Relevant Date: Finance Act 2019