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

Computing Chargeable Gains and Allowable Costs

Updated 11 October 2026 · Fact-checked

A chargeable gain is disposal proceeds less allowable costs. Costs are the original cost, incidental costs of buying and selling, and enhancement expenditure still reflected in the asset at disposal. For gifts and sales to connected persons, you use market value instead of actual proceeds. Then deduct losses and the annual exempt amount.

Understand Computing Chargeable Gains and Allowable Costs

Capital gains tax (CGT) charges an individual on the increase in value of an asset between acquisition and disposal. You do not tax the whole sale price. You tax the gain, so the first job is to find the right figure for proceeds and the right figure for cost.

Proceeds are normally the amount received. Deduct the incidental costs of disposal, such as legal fees, estate agent fees and valuation fees. For cost, start with the price paid and add the incidental costs of acquisition, such as legal fees and stamp duty land tax. Then add enhancement expenditure. This is capital spending that adds to the asset's value and is still reflected in the asset when you dispose of it. A new extension counts. Routine repairs and redecoration do not. Costs of defending title to the asset can also qualify.

Some disposals are not at arm's length. If you give an asset away, or sell it to a connected person, the law replaces the actual proceeds with market value. This stops people cutting the tax bill by selling cheaply to family. Connected persons include your spouse or civil partner, your relatives and your spouse's relatives, and a business partner and their relatives. Transfers between spouses living together are a separate no-gain, no-loss rule, so check for it first.

The same rule applies if you sell at an undervalue to a connected person. A sale to a connected person at more than market value still uses the actual price. If you sell at a bargain price to someone unconnected, the actual price is used, unless the deal is not a bargain made at arm's length, for example where a gift element is intended.

Once each gain or loss is found, you net them for the tax year. Deduct current-year losses first, then brought-forward losses only as far as needed to bring the gain down to the annual exempt amount, which is £3,000 for 2025/26. The remaining taxable gain is charged at 18% or 24%, depending on how much of the basic rate band is unused. Business asset disposal relief and investors' relief can reduce the rate to 14% on qualifying gains up to a lifetime limit of £1,000,000 each.

Key rules to remember

Basic gain computation: Gain = Proceeds − incidental costs of disposal − cost − incidental costs of acquisition − enhancement expenditure; Use market value for proceeds on gifts and connected person sales.
Market value rule: Gift or sale to connected person: deemed proceeds = market value at disposal date; Spouse or civil partner living together: no gain, no loss transfer instead.
Taxable gain: Taxable gain = net chargeable gains − brought-forward losses (only as needed) − annual exempt amount; The annual exempt amount is £3,000 and is given in the tax tables.
CGT rates: Lower rate 18%; higher rate 24%; BADR and investors' relief 14%; Lifetime limit for each of BADR and investors' relief is £1,000,000.

How to solve Computing Chargeable Gains and Allowable Costs questions

Use the same layout for every asset. Show every working, as the exam instructions require, and round to the nearest £.

1Identify the disposal and its date. Check whether it is a sale, a gift or a sale to a connected person.
2Check for the spouse or civil partner no-gain, no-loss rule before you apply market value.
3Set proceeds: actual proceeds for an arm's length sale, otherwise market value. Deduct the incidental costs of disposal.
4List the cost: purchase price plus incidental costs of acquisition.
5Add enhancement expenditure that is capital in nature and still reflected in the asset. Leave out repairs and maintenance.
6Compute the gain or loss. A loss is not set against income. It is dealt with under the capital loss rules.
7Net all gains and losses for the year, deduct losses as the rules allow, then the annual exempt amount.
8Apply the correct rate to the taxable gain and state the CGT due.

Quickest way: Four-line gain layout

When to use it: Use it for any single-asset computation when time is short.

Line 1: proceeds, or market value, less disposal costs.
Line 2: cost plus acquisition costs.
Line 3: enhancement expenditure, with a one-word reason for any item you reject.
Line 4: gain = line 1 less lines 2 and 3. Then move to the annual exempt amount and rates.

Common mistakes in Computing Chargeable Gains and Allowable Costs

Using actual sale price for a gift or connected person sale.
Students focus on the cash figure in the question.
Fix: Read who the buyer is. If it is a gift or a connected person, use market value.
Deducting repairs or redecoration as enhancement expenditure.
Students treat all spending on the asset as cost.
Fix: Allow only capital spending that adds value and is still reflected in the asset at disposal.
Forgetting incidental costs of acquisition or disposal.
These costs appear in the question as small side notes.
Fix: Scan the data for legal fees, agent fees and stamp duty land tax, and put them in the layout.
Applying market value to a spouse transfer.
Spouses are connected persons, so students apply the connected persons rule.
Fix: For spouses living together, use no gain, no loss. The receiving spouse takes over the original cost.
Using the annual exempt amount before deducting current-year losses.
Students mix up the order of relief.
Fix: Deduct current-year losses in full first. Use brought-forward losses only to reduce gains to the exempt amount.

Worked examples

Example 1

Amara bought a shop unit for £120,000 in 2016, paying legal fees of £2,000 and stamp duty land tax of £3,000. In 2019 she built an extension for £25,000, which still exists. In 2022 she spent £4,000 repainting. In December 2025 she sold the unit to an unconnected buyer for £250,000, paying legal and agent fees of £5,000. Compute the chargeable gain.

Show the solution

Proceeds: £250,000.
Less incidental costs of disposal: £5,000. Net proceeds are £245,000.
Cost: £120,000 plus £2,000 legal fees plus £3,000 stamp duty land tax = £125,000.
Enhancement expenditure: the extension of £25,000 is allowable. The repainting of £4,000 is revenue repair and is not allowable.
Total allowable cost: £125,000 + £25,000 = £150,000.
Gain: £245,000 − £150,000 = £95,000.

Answer: The chargeable gain is £95,000.

Example 2

Bruno bought land for £60,000 in 2018, with incidental acquisition costs of £1,500. In March 2026 he sold it to his brother for £70,000. Its market value was £110,000. He paid legal fees of £2,500 on the sale. Bruno has no other disposals, no losses and has used none of the 2025/26 annual exempt amount. Compute the gain before any CGT rate.

Show the solution

His brother is a relative, so the buyer is a connected person.
Market value of £110,000 replaces the actual price of £70,000.
Less incidental costs of disposal: £2,500. Net proceeds are £107,500.
Cost: £60,000 + £1,500 = £61,500.
Gain: £107,500 − £61,500 = £46,000.
Less annual exempt amount: £3,000.
Taxable gain: £43,000.

Answer: The chargeable gain is £46,000, and the taxable gain after the £3,000 annual exempt amount is £43,000.

Exam tips

Underline the buyer in the question. Gift or family means market value.
Show every working. Marks go for each correct item, even if one number is wrong.
Write a short note beside each rejected cost, for example repair not enhancement. It earns marks and shows scepticism.
Take the annual exempt amount, rates and BADR limits from the tax tables in the exam. Do not memorise from other years.
Where a client asks for advice, state the gain, then the tax, then one sentence on what it means for them.

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

Computing Chargeable Gains and Allowable Costs in other exams

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

Computing Chargeable Gains and Allowable Costs: frequently asked questions

What counts as enhancement expenditure for CGT?

It is capital spending that adds to the asset's value, and the result must still be reflected in the asset when you dispose of it. An extension is an example. Repairs and redecoration are revenue costs and are not allowed.

When do I use market value instead of the sale price?

Use market value where the disposal is a gift, or a sale to a connected person. Relatives and a spouse or civil partner are examples of connected persons. Spouses living together use no gain, no loss instead.

Are incidental costs deducted twice?

No. Acquisition costs go into the cost figure. Disposal costs reduce the proceeds. Each cost is used once.

What is the annual exempt amount in ATX-UK?

For the exam period covered by Finance Act 2025, it is £3,000. It is given in the tax tables, along with CGT rates of 18% and 24%.