How capital gains tax is calculated

Capital gains tax is worked out on each disposal by taking the proceeds, or market value where the rules require it, and deducting the allowable costs of buying, improving and selling the asset. The gains for the tax year are added together, losses of the same year are deducted, then the £3,000 annual exempt amount for 2026 to 2027, then any losses brought forward. What remains is taxed at 18% within your unused basic rate band and 24% above it.

What counts as a disposal, and what figure do you start with?

A disposal includes selling an asset, giving it away, swapping it, or receiving compensation for it, such as an insurance payout when it is lost or destroyed. If you own an asset jointly, you work out the gain on your share only.

The starting figure is normally the amount you received. GOV.UK lists the cases where market value replaces it:

Situation	Use market value at
Gifts	Date of the gift
Sold for less than it was worth to help the buyer	Date of sale
Inherited asset where you do not know the inheritance tax value	Date of death
Owned before April 1982	31 March 1982

HMRC can check a valuation after the disposal if you send a post transaction valuation check form, and GOV.UK says to allow at least 3 months for a reply. Gifts between spouses and civil partners, and gifts to charity, have their own rules and usually produce no tax.

Which costs can you deduct?

Section 38 of the Taxation of Chargeable Gains Act 1992 limits deductions to three types of cost, each incurred wholly and exclusively:

1. The cost of acquiring the asset, plus incidental costs of acquisition.
2. Enhancement expenditure that adds value and is reflected in the state or nature of the asset when you dispose of it, plus costs of establishing, preserving or defending your title to it.
3. Incidental costs of disposal.

Incidental costs are fees of surveyors, valuers, auctioneers, accountants, agents and legal advisers, the costs of transfer including stamp duty and Stamp Duty Land Tax, advertising to find a seller or buyer, and reasonable costs of a valuation needed for the computation. GOV.UK gives an extension as an improvement that counts and decorating as maintenance that does not. Interest on a loan to buy the asset is not deductible, and nor is anything you have already claimed as a business expense. VAT is part of the cost only if you cannot reclaim it.

How are shares bought at different times handled?

Shares of the same class in the same company are pooled. You usually use the average cost of the pool. GOV.UK’s example: 100 shares bought for £80 and 300 for £360 gives 400 shares costing £440, an average of £1.10, so selling 150 shares uses a cost of £165. Special rules apply if you buy shares of the same class within 30 days of selling, so the pool is not always the right cost.

How are capital losses used?

Allowable losses are losses on chargeable assets that you report to HMRC. Losses of the same tax year are set against that year’s gains first, and under section 1K of the 1992 Act this happens before the annual exempt amount, so same year losses cannot be held back to protect the allowance. Losses brought forward from earlier years are used only to reduce the remaining gains to the level of the allowance, and anything left carries forward again. A loss must be claimed within 4 years of the end of the tax year of the disposal.

There are restrictions. A loss on a disposal to a family member or other connected person can only be set against gains on disposals to the same person, as explained in connected persons. If an asset you still own has become worthless, you can create a loss through a negligible value claim.

How does the annual exempt amount work?

The annual exempt amount is £3,000 for individuals and £1,500 for trusts in 2026 to 2027. Section 1K says it is deducted after same year losses and before losses from earlier years, and that it can be set against gains in whatever way is most beneficial, regardless of the rate that would otherwise apply. In practice you set it against gains that would be taxed at 24% before gains taxed at 18%.

Which rate applies to the gains that are left?

From 6 April 2026 the rates for individuals are:

• 18% on taxable gains that fall within your unused basic rate band, which is £37,700 for 2026 to 2027;
• 24% on gains above that band, and for all gains of higher and additional rate taxpayers;
• 24% for trustees and personal representatives;
• 18% on gains qualifying for business asset disposal relief.

To find the split, take your taxable income after the personal allowance, add your gains after losses and the annual exempt amount, and see how much falls within the basic rate band. The rates themselves and their history are set out in capital gains tax rates.

What does a full calculation look like?

Illustration only. In 2026 to 2027 Helen has taxable income of £25,000 after her personal allowance. She sells a let flat for £260,000, paying £4,000 in agent and legal fees. She bought it in 2014 for £180,000, paid £6,000 in Stamp Duty Land Tax and legal fees, built an extension for £20,000 and spent £3,000 on redecoration. She also sells shares at a loss of £5,000 and has £2,000 of losses brought forward.

Step	Amount
Proceeds	£260,000
Less costs of sale	(£4,000)
Less purchase price and acquisition costs	(£186,000)
Less extension (redecoration is not allowable)	(£20,000)
Gain on the flat	£50,000
Less same year loss on shares	(£5,000)
Less annual exempt amount	(£3,000)
Less losses brought forward	(£2,000)
Taxable gains	£40,000

Helen has £12,700 of basic rate band left (£37,700 less £25,000). Tax is £12,700 at 18%, which is £2,286, plus £27,300 at 24%, which is £6,552, giving £8,838. Because this is UK residential property she must report and pay within 60 days of completion, as described in the 60 day property return, then include the sale on her tax return.

How and when do you report the gain?

Gains on UK residential property must be reported and paid within 60 days of completion. Other gains go on a self assessment return, or can be reported through HMRC’s real time service, in which case you report by 31 December after the tax year and pay by 31 January. If you are in self assessment you must report disposals where total proceeds exceeded £50,000, even if the gains are covered by the allowance. Non residents must report every disposal of UK property, even where there is no tax.

What mistakes are most common?

• Deducting repairs, redecoration or mortgage interest as if they were improvements.
• Using the price paid instead of market value on a gift to a child or other relative. Check whether gift holdover relief is available.
• Assuming every property sale is a capital gain. Profits from developing or dealing can be trading income under the property dealing anti avoidance rules.
• Forgetting to claim a loss within 4 years, or trying to keep a same year loss for a later year.
• Not keeping purchase and improvement invoices. You need them to prove your costs, sometimes decades after the purchase.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

• What costs can be deducted from a capital gain
• The capital gains annual exempt amount
• Capital gains tax for trustees
• Claiming and using capital losses
• Selling a second home: capital gains tax
• Share matching rules: same day, 30 day and section 104

Sources

• GOV.UK: Capital gains tax
• GOV.UK: What you pay it on
• GOV.UK: Market value
• legislation.gov.uk: Act 1992 c. 12, section 38
• GOV.UK: Work out your gain
• GOV.UK: Work out your gain
• GOV.UK: Same company
• GOV.UK: Losses
• legislation.gov.uk: Act 1992 c. 12, section 1K
• GOV.UK: Allowances

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.