Why It’s Time to Bring Back Indexation Allowance: Adam’s Story

In 2001, Adam purchased a property for £97,000 in an area that wasn’t exactly desirable. His tenant situation wasn’t ideal either, but Adam did his best to keep things running smoothly. When his tenant passed away, Adam decided it was time to sell, but before he could, he was forced to spend thousands removing rubbish left behind and handling a pest infestation. Without enough funds to refurbish the property, Adam eventually sold it for £138,000.

At first glance, this seems like a reasonable profit—£41,000 more than his original purchase price. But when you factor in inflation, the story changes dramatically. According to the Bank of England’s inflation calculator, the £97,000 Adam spent in 2001 is the equivalent of £176,929.89 in today’s money. In real terms, Adam made a loss of nearly £39,000, yet he is still forced to pay Capital Gains Tax (CGT) as if he had made a profit.

What’s Wrong with This Picture?

Without Indexation Allowance, which adjusted gains for inflation before being scrapped in 2018, Adam—and countless other landlords like him—are being taxed on “paper gains” that don’t reflect the real value of their property. Adam hasn’t actually gained anything in real terms. In fact, his property’s value has dropped by nearly £39,000 after accounting for inflation, yet he’s being forced to pay tax on what is, in reality, a loss.

This is the core issue with the current tax system for landlords. Without Indexation Allowance, landlords are paying CGT not on their real gains, but on inflationary increases—essentially, being taxed on money that doesn’t exist. For small landlords like Adam, who face rising costs and are already squeezed by Section 24 and Stamp Duty Land Tax (SDLT) surcharges, this is just another burden pushing them out of the market.

Why We Need Indexation Allowance Back

Bringing back Indexation Allowance would ensure that landlords are only taxed on real gains, not inflationary ones. This would be a simple and fair reform that would:

• Allow landlords to deduct inflationary increases from their property sale price when calculating CGT.
• Ensure that landlords who have held properties for many years are not penalised for inflation, which is outside their control.
• Encourage landlords to remain in the market, reducing the current exodus and helping to stabilise the rental sector.

Adam’s story is just one example of how unfair the system can be without Indexation Allowance. While he is technically facing a real-terms loss, he still has to pay CGT on a supposed gain, reducing any funds he might have to reinvest in the property market or elsewhere.

The Bigger Picture: Why This Matters

The absence of Indexation Allowance isn’t just an issue for landlords—it’s an issue for the entire housing market. As landlords like Adam are forced out due to unfair taxation, fewer rental properties become available, pushing rents higher and making the market more difficult for tenants.

Reinstating Indexation Allowance would go a long way toward:

• Retaining small landlords in the market, ensuring a steady supply of rental properties.
• Helping landlords to reinvest in properties or expand their portfolios, keeping rental stock in good condition.
• Reducing the pressure on tenants, who ultimately suffer from rising rents as the supply of rental properties shrinks.

The Time for Action Is Now

With inflation continuing to rise, the need for Indexation Allowance is more urgent than ever. Without it, landlords will continue to face unfair tax burdens on inflation-driven gains, forcing many out of the market and driving up rents.

Bringing back Indexation Allowance is a fair, reasonable reform that would benefit both landlords and tenants, helping to stabilise the private rental sector and ensure that the market remains accessible to all.

Support Our Campaign for Fair Tax Treatment

At Property118, we are campaigning for the reinstatement of Indexation Allowance and other reforms to ensure fair tax treatment for landlords. If you believe that landlords like Adam shouldn’t be taxed on inflationary gains, consider supporting our campaign today.

Every donation counts. Use the form below to help us fight for a fairer tax system for landlords across the UK.

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