Advanced Taxation (UK) · Capital gains tax: the basic principles of computing gains and losses

Capital Losses and Their Relief in UK CGT

Updated 11 October 2026 · Fact-checked

Capital losses reduce chargeable gains. Set current year losses against current year gains in full, even if that wastes the annual exempt amount. Then deduct the annual exempt amount. Use brought forward losses only to cut remaining gains down to the annual exempt amount. Losses on disposals to connected persons can only be used against gains on disposals to that same person.

Understand Capital Losses and Their Relief

A capital loss arises when an asset's allowable cost is more than its disposal proceeds. The loss is only allowable if a gain on the same asset would have been chargeable. So a loss on an exempt asset, such as a private car, gives no relief.

There are three kinds of loss to keep apart. Current year losses arise in the same tax year as the gains. Brought forward losses arose in earlier years and were not fully used. Connected person losses arise on a disposal to someone connected with you, and they are ring-fenced.

The key point is the different treatment of current year and brought forward losses. Current year losses must be set off in full against current year gains. You have no choice, even if the gains then fall below the annual exempt amount (AEA). That wastes some of the AEA. Brought forward losses are different. You use them only to the extent needed to reduce net gains to the AEA, so the AEA is never wasted. Any unused brought forward loss is carried forward with no time limit.

A loss on a disposal to a connected person (for example a relative, a spouse's relative, a company you control, or trustees of a settlement you made) cannot be set against your other gains. It can only be set against gains on disposals to that same connected person, in the same year or in later years. Disposals between spouses or civil partners living together are normally no gain, no loss, so they create no loss at all.

The ATX-UK tax tables give the AEA of £3,000 and the CGT rates of 18% and 24%. Losses are set off before the rate is applied, so where you have a choice, think about which gains carry the highest tax rate.

Key rules to remember

Order of set-off: Gains − current year losses = net gains; then net gains − brought forward losses (only down to AEA) − AEA = taxable gains; Current year losses come off first and in full. Brought forward losses are used only as far as needed to leave the AEA. Connected person losses are not part of this general order. They are set only against gains on disposals to the same connected person.
Brought forward loss used: B/f loss used = lower of (net gains after current year losses − AEA) and (b/f loss available); If net gains are already at or below the AEA, use none. The loss is carried forward in full.
Annual exempt amount: AEA = £3,000; Given in the tax tables. Unused AEA cannot be carried forward or back.
CGT rates: Lower rate 18%; higher rate 24%; business asset disposal relief and investors' relief 14%; Given in the tax tables. The 14% rate applies to gains that qualify for business asset disposal relief or investors' relief. Apply losses to gains taxed at the highest rate first where you have a choice.
Connected person loss: Loss on disposal to connected person → set only against gains on disposals to the same person; Applies now and in future years. It cannot be used against any other gains, and it is not deducted in the general order of set-off.
Claim time limit (general law, not in the tax tables): Loss must be reported to HMRC within four years of the end of the tax year in which it arose; This is general law. It is not taken from the ATX-UK tax tables. If the loss is not reported in time, it cannot be carried forward.

How to solve Capital Losses and Their Relief questions

Use the same sequence for every loss question. The order matters because of the AEA.

1List every disposal and compute each gain or loss. Drop any loss on an exempt asset. Treat spouse or civil partner transfers as no gain, no loss.
2Separate out any loss on a disposal to a connected person. Match it only with gains on disposals to that same person.
3Total the current year gains and set current year losses against them in full. If there is a choice of gains, use the loss against gains taxed at the highest rate first.
4Deduct the AEA of £3,000 from the remaining net gains. If net gains are below £3,000, the excess AEA is wasted.
5Work out how much brought forward loss to use. It is the net gains after current year losses, less the AEA, capped at the loss available. Never use more than that.
6Deduct the brought forward loss used and the AEA to find taxable gains. Then apply 18% or 24% depending on the taxpayer's remaining basic rate band, or 14% for gains qualifying for business asset disposal relief or investors' relief.
7State the loss carried forward: unused brought forward loss plus any unused connected person loss. Say what it can be set against.

Quickest way: Three-line loss check

When to use it: Use this when a question gives you gains, a current loss and a brought forward loss and asks for the taxable gain.

Line 1: gains − current year loss = net gain.
Line 2: net gain − £3,000 = maximum b/f loss usable. Use the lower of this and the b/f loss. If it is negative, use nil.
Line 3: net gain − b/f loss used − AEA = taxable gain. Carry forward the unused b/f loss and say so.

Common mistakes in Capital Losses and Their Relief

Using brought forward losses before the annual exempt amount, so the AEA is wasted.
Students treat all losses the same and deduct them first.
Fix: Only use brought forward losses to reduce net gains to £3,000. Deduct the AEA in your head first to find how much loss you need.
Carrying forward a current year loss instead of setting it against current year gains when the gains are low.
Students want to protect the AEA.
Fix: Current year losses must be set off in full against current year gains. Only the excess loss is carried forward. The AEA can be wasted.
Setting a loss on a sale to a connected person against other gains.
Students forget the ring-fence, or do not spot that the buyer is a relative or a company they control.
Fix: Check who the buyer is. If connected, the loss can only be used against gains on disposals to that same person.
Giving relief for a loss on an exempt asset, such as a private car.
Students compute the loss and then forget that a gain would not have been chargeable.
Fix: Ask first whether a gain on the asset would be chargeable. If not, the loss is not allowable.
Forgetting to state the loss carried forward.
Students stop when they reach the taxable gain.
Fix: Always finish with the amount carried forward, and note that brought forward losses have no time limit once reported.
Applying losses without thinking about the rate of tax.
Students focus on the arithmetic only.
Fix: Where a question has gains taxed at different rates, set losses against the gains taxed at the highest rate first and explain why.

Worked examples

Example 1

In 2025/26 Priya, a higher rate taxpayer, has a gain of £22,000 on shares and an allowable loss of £8,000 on another asset. She has brought forward capital losses of £15,000, which were reported to HMRC in time. Compute her taxable gain and the loss carried forward.

Show the solution

Net gains after the current year loss: £22,000 − £8,000 = £14,000.
The AEA is £3,000. Maximum brought forward loss that is usable: £14,000 − £3,000 = £11,000.
She has £15,000 available, so she uses £11,000. Unused loss: £15,000 − £11,000 = £4,000.
Taxable gain: £14,000 − £11,000 − £3,000 (AEA) = nil.
CGT payable: nil.

Answer: Taxable gain is nil and no CGT is payable. £4,000 of brought forward loss is carried forward to 2026/27. The AEA of £3,000 is fully used.

Example 2

In 2025/26 Marcus, a higher rate taxpayer, sells shares to his brother at a loss of £9,000. He also has a gain of £20,000 on other assets and has brought forward losses of £2,000. In 2026/27 he makes a gain of £12,000 on another disposal to his brother and has no other gains. Assume the AEA is £3,000 in both years and the gains are taxed at 24%. Compute the CGT for both years.

Show the solution

2025/26: the £9,000 loss is a connected person loss. It cannot be set against the £20,000 gain. It is carried forward to be used against gains on disposals to his brother.
Net gains: £20,000. Maximum brought forward loss usable: £20,000 − £3,000 = £17,000. He only has £2,000, so he uses all of it.
Taxable gain: £20,000 − £2,000 − £3,000 = £15,000.
CGT: £15,000 × 24% = £3,600.
2026/27: the gain of £12,000 is on a disposal to his brother, so the £9,000 loss can be set against it in full. Net gain: £12,000 − £9,000 = £3,000.
Deduct the AEA of £3,000: taxable gain nil. CGT nil.

Answer: 2025/26 taxable gain is £15,000 and CGT is £3,600. 2026/27 taxable gain is nil and CGT is nil, because the connected person loss is used against the gain on the disposal to his brother.

Exam tips

Draw a short layout: gains, current year losses, AEA, b/f losses. Write the loss line before the AEA line in your working so the order is visible to the marker.
Always say why a loss cannot be used, for example 'connected person, so ring-fenced'. Explanations earn marks in Section A.
In planning questions, look for a client who wastes the AEA or holds unused losses. Advise on timing of disposals or choosing which asset to sell.
Check the buyer's identity in every scenario. A sale to a relative, or to a company the seller controls, signals a connected person loss.
Use the tax tables for the AEA and rates. Do not rely on memory.

Practice questions from Capital gains tax: the basic principles of computing gains and losses

Capital Losses and Their Relief in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital Losses and Their Relief: frequently asked questions

What is the difference between current year and brought forward capital losses?

Current year losses must be set against current year gains in full, even if this wastes the AEA. Brought forward losses are used only to reduce net gains to the AEA. Unused brought forward losses carry forward with no time limit.

Do capital losses come off before or after the annual exempt amount?

Current year losses come off before the AEA. Brought forward losses are used after the AEA is taken into account, because you only use enough to leave gains equal to the AEA.

Can I set a capital loss against income?

Generally no. Capital losses are set against capital gains. Some limited reliefs exist elsewhere, such as for certain share losses, so check the question and the related topic.

What is the rule for capital losses on disposals to connected persons?

The loss can only be set against gains on disposals to the same connected person. It can be used in the same year or any later year. It cannot be set against gains on disposals to anyone else.