What Improvements Are Allowed For Capital Gains Tax
- MAZ
- Jun 17
- 14 min read
The Audio Summary of the Key Points of the Article:
Understanding Allowable Improvements for Capital Gains Tax in the UK for 2025-26
Now, if you’ve ever sold a property, shares, or another valuable asset in the UK, you’ve probably come face-to-face with Capital Gains Tax (CGT). It’s the tax on the profit you make when you “dispose of” an asset that’s gone up in value. But here’s the good news: not every penny of that profit is taxable. Certain costs, like improvements to the asset, can be deducted to shrink your taxable gain. So, what improvements are allowed for CGT in the 2025-26 tax year? Let’s dive into the nitty-gritty, with practical tips and real-world examples to help UK taxpayers and business owners save money legally.
What Exactly Are Allowable Improvements for CGT?
Let’s start with the basics. When you sell an asset, HMRC doesn’t tax the full sale price—just the gain, which is the difference between what you paid for it and what you sold it for. But you can reduce this gain by deducting certain costs, including improvements. According to HMRC’s March 2025 guidance, allowable improvements are capital expenditures that enhance the asset’s value, are still part of the asset when sold, and aren’t routine repairs or maintenance. Think of it like this: if you add a swanky new kitchen to your rental property, that’s an improvement. Repainting the walls? That’s just maintenance.
For the 2025-26 tax year, the rules haven’t shifted dramatically from 2024-25, but the stakes are higher because the CGT annual exempt amount remains frozen at £3,000. This means every deduction counts more than ever. Plus, CGT rates for most assets (except residential property and carried interest) are now 18% for basic-rate taxpayers and 24% for higher-rate taxpayers, effective from 30 October 2024. For residential property, rates stay at 18% and 24%, but the alignment of rates for all assets simplifies things a bit.
What Types of Improvements Qualify?
Now, let’s get specific. HMRC is picky about what counts as an improvement, so you need to know the rules to avoid a costly mistake. Here’s what qualifies:
Structural Additions: Building an extension, loft conversion, or conservatory on a property.
Permanent Enhancements: Installing solar panels, upgrading heating systems, or adding double glazing.
Landscaping: Creating a new garden layout or adding a driveway (but not mowing the lawn).
Professional Fees for Improvements: Architect or surveyor fees directly tied to the improvement work.
Disability Adaptations: Permanent modifications like ramps or widened doorways for accessibility, as per HMRC’s 2025 guidance under Equality Act principles.
Be careful! The improvement must still be part of the asset when you sell it. If you build a fancy gazebo but remove it before selling the property, you can’t deduct the cost. And routine maintenance—like fixing a leaky roof or redecorating—doesn’t count, even if it makes the place look nicer.
What Doesn’t Count as an Improvement?
None of us is a tax expert, but it’s easy to assume that any money spent on an asset should reduce your tax bill. Not so fast. HMRC draws a clear line between improvements and other costs. Here’s what’s off the table:
Repairs and Maintenance: Replacing broken windows, repainting, or servicing a boiler.
Temporary Additions: Items you can remove, like portable air conditioners or detachable furniture.
Running Costs: Mortgage interest, insurance, or utility bills.
Your Own Labour: If you DIY an improvement, only material costs count—your time isn’t deductible unless you’re a registered company charging for the work.
So the question is: how do you know if a cost qualifies? Ask yourself: Does it permanently enhance the asset’s value? Is it still there when you sell? Do you have receipts to prove it? If you answer “yes” to all three, you’re likely on solid ground.
How Do Improvements Impact Your CGT Calculation?
Now consider this: If you’re selling a rental property or shares, understanding how improvements fit into the CGT calculation can save you thousands. Here’s a simplified example for the 2025-26 tax year:
Purchase Price: £200,000 (rental property bought in 2015).
Sale Price: £350,000 (sold in September 2025).
Improvement Costs: £25,000 (loft conversion in 2020).
Incidental Costs: £5,000 (legal fees for buying and selling).
Gain Before Deductions: £350,000 - £200,000 = £150,000.
Taxable Gain: £150,000 - £25,000 (improvements) - £5,000 (incidental costs) = £120,000.
After Annual Exempt Amount: £120,000 - £3,000 = £117,000.
CGT Liability: If you’re a higher-rate taxpayer, £117,000 x 24% = £28,080.
Without the £25,000 improvement deduction, your taxable gain would’ve been £142,000, costing you an extra £6,000 in tax. That’s why documenting improvements is crucial.
Table 1: Example CGT Calculation with Improvements (2025-26)
Item | Amount (£) |
Sale Price | 350,000 |
Purchase Price | 200,000 |
Gross Gain | 150,000 |
Improvement Costs (Loft) | 25,000 |
Incidental Costs (Fees) | 5,000 |
Taxable Gain | 120,000 |
Annual Exempt Amount | 3,000 |
Final Taxable Gain | 117,000 |
CGT at 24% (Higher Rate) | 28,080 |
Case Study: Penelope’s Solar Panel Success
Let’s make this real with a case study. Penelope Hargreaves, a Sheffield landlord, bought a semi-detached rental property in 2018 for £250,000. In 2023, she installed an £18,000 solar panel system to boost the property’s energy efficiency and appeal. In July 2025, she sold the property for £675,000. Her improvement costs, plus £10,000 in legal and estate agent fees, reduced her taxable gain significantly.
Gross Gain: £675,000 - £250,000 = £425,000.
Deductions: £18,000 (solar panels) + £10,000 (fees) = £28,000.
Taxable Gain: £425,000 - £28,000 = £397,000.
After AEA: £397,000 - £3,000 = £394,000.
CGT at 24%: £394,000 x 24% = £94,560.
By claiming the solar panel cost, Penelope saved £4,320 (£18,000 x 24%). She kept detailed invoices and planning permissions, which HMRC accepted without issue. This shows how eco-friendly improvements, backed by proper records, can be a tax-saving win.
Why Documentation Is Your Best Friend?
Be warned! HMRC is strict about proof. If you claim an improvement, you need to back it up with receipts, invoices, or contracts showing the date, cost, and nature of the work. For example, if you spent £30,000 on a kitchen extension, keep the builder’s invoice, payment records, and any planning permissions. Without proof, HMRC could disallow the deduction, leaving you with a bigger tax bill.
Now, it shouldn’t surprise you that HMRC might audit your CGT return, especially if you claim large deductions. To stay safe, store records for at least six years after the tax year of the sale. Digital copies are fine, but make sure they’re clear and accessible. If you’re a business owner, consider using accounting software to track improvement costs alongside other expenses.
Maximising Your CGT Savings: Practical Strategies for UK Taxpayers in 2025-26
Now, if you’re wondering how to make the most of allowable improvements to cut your Capital Gains Tax (CGT) bill, you’re in the right place. For the 2025-26 tax year, UK taxpayers and business owners can leverage specific strategies to ensure every qualifying improvement counts. This part dives into practical steps, real-world applications, and lesser-known tips to help you navigate the CGT landscape like a pro. From property upgrades to business asset enhancements, we’ll cover how to optimise deductions while staying on HMRC’s good side.
How Can You Identify Qualifying Improvements for Properties?
Let’s face it: property is the big one for most UK taxpayers when it comes to CGT. Whether you’re selling a second home, a rental property, or even your main residence in specific cases (like if you’ve let it out), improvements can significantly reduce your tax liability. So, what’s the trick to spotting qualifying improvements? It’s all about permanence and value. For example, adding a new bathroom or converting a garage into a living space counts because it boosts the property’s market value and stays with the property when sold.
Here’s a quick rundown of property improvements that HMRC typically allows for 2025-26, based on their latest guidance:
Structural Upgrades: Extensions, loft conversions, or adding a conservatory.
Energy Efficiency: Solar panels, insulation upgrades, or modern heating systems.
Land Improvements: Building a permanent driveway or redesigning a garden layout.
Accessibility Features: Installing lifts or ramps for disability access.
Be careful! If you’re claiming improvements, they must reflect in the property’s value at sale. For instance, a £20,000 kitchen upgrade might not count if it’s outdated by the time you sell, and HMRC could argue it didn’t enhance the value. Always get a valuation or surveyor’s report to back up your claim if the improvement’s impact is unclear.
Can Business Assets Qualify for Improvement Deductions?
Now, let’s talk business. If you’re a business owner selling assets like machinery, vehicles, or commercial property, you can also deduct improvement costs. The catch? The improvement must enhance the asset’s value or functionality in a permanent way. For example, upgrading a commercial building’s electrical system to support new equipment qualifies, but repainting the office walls doesn’t.
Consider this scenario: Tariq Khan, a Manchester-based café owner, bought a commercial property in 2019 for £300,000. In 2022, he spent £40,000 installing a state-of-the-art ventilation system to improve the café’s capacity. When he sold the property in August 2025 for £500,000, he deducted the £40,000 as an improvement, alongside £8,000 in legal and surveyor fees. His taxable gain dropped from £200,000 to £152,000, saving him £11,520 in CGT (at the 24% higher rate). Tariq’s case shows how business owners can use improvements strategically, especially for assets tied to revenue growth.
Table 2: CGT Calculation for Business Asset with Improvements (2025-26)
Item | Amount (£) |
Sale Price | 500,000 |
Purchase Price | 300,000 |
Gross Gain | 200,000 |
Improvement Costs (Ventilation) | 40,000 |
Incidental Costs (Fees) | 8,000 |
Taxable Gain | 152,000 |
Annual Exempt Amount | 3,000 |
Final Taxable Gain | 149,000 |
CGT at 24% (Higher Rate) | 35,760 |
How Do You Handle Mixed-Use Properties?
Now, here’s a tricky one: mixed-use properties, like a shop with a flat above it or a home office. For 2025-26, HMRC allows improvement deductions, but only for the portion of the property used for business or taxable purposes. Say you own a property where 60% is a commercial shop and 40% is your private residence. If you spend £50,000 on a new roof that benefits both parts, you can only deduct 60% (£30,000) for CGT purposes, as the residential portion is usually exempt (unless you’ve triggered CGT through letting or business use).
So the question is: how do you calculate this split? HMRC suggests apportioning costs based on floor space or market value. For example, if your surveyor confirms the shop is 60% of the property’s value, you’d allocate 60% of the improvement cost. Keep detailed records, including surveyor reports or architect plans, to justify the split. If HMRC challenges your claim, having professional documentation is your best defence.
What About Eco-Friendly Improvements?
Now, it shouldn’t surprise you that eco-friendly upgrades are a hot topic for 2025-26. With the UK’s push towards net zero, improvements like solar panels, heat pumps, or insulation upgrades are increasingly common—and HMRC allows them as deductions if they’re permanent and enhance value. For instance, installing a £15,000 solar panel system that cuts energy bills and boosts a property’s EPC rating can be deducted in full, provided you have invoices and proof of installation.
Here’s a tip: eco-improvements can also qualify for other tax reliefs, like VAT reductions on energy-saving materials (confirmed in HMRC’s March 2025 guidance). While these don’t directly reduce CGT, they lower your overall costs, leaving more cash in your pocket. For business owners, check if the improvement qualifies for capital allowances before claiming it as a CGT deduction—double-dipping isn’t allowed.
Step-by-Step Guide: Claiming Improvements on Your CGT Return
None of us wants to mess up a tax return, so here’s a practical guide to claiming improvement deductions for 2025-26:
Identify Qualifying Costs: Review your records for capital improvements (e.g., extensions, solar panels) that enhance the asset’s value and remain at sale.
Gather Documentation: Collect receipts, invoices, contracts, and planning permissions. For mixed-use properties, get a surveyor’s report to apportion costs.
Calculate Your Gain: Subtract the purchase price, improvement costs, and incidental costs (e.g., legal fees) from the sale price.
Apply the Annual Exempt Amount: Deduct £3,000 (or your remaining allowance if you’ve had multiple disposals).
Determine Your Tax Rate: Use 18% (basic rate) or 24% (higher rate) for most assets, including property, based on your income tax band.
File Your Return: Report the gain on your Self Assessment tax return by 31 January 2027 for disposals in 2025-26. For property, you may need to file a CGT return within 60 days of sale.
Keep Records: Store all documentation for at least six years in case HMRC queries your return.
What Happens If You Miss a Deduction?
Be warned! Missing an allowable improvement can cost you dearly. Let’s say you forget to deduct a £10,000 conservatory when selling a rental property. At the 24% CGT rate, that’s an extra £2,400 in tax. If you realise the mistake after filing, you can amend your Self Assessment return within 12 months or appeal to HMRC with evidence. But it’s better to get it right the first time—double-check your records before submitting.
Case Study: Elowen’s Loft Conversion Lesson
Let’s bring this to life. Elowen Tremayne, a Bristol-based freelancer, sold her buy-to-let flat in June 2025 for £400,000, having bought it in 2017 for £220,000. In 2021, she spent £30,000 on a loft conversion to create an extra bedroom, boosting the flat’s rental income and sale value. She also incurred £6,000 in legal and estate agent fees. Here’s how it played out:
Gross Gain: £400,000 - £220,000 = £180,000.
Deductions: £30,000 (loft conversion) + £6,000 (fees) = £36,000.
Taxable Gain: £180,000 - £36,000 = £144,000.
After AEA: £144,000 - £3,000 = £141,000.
CGT at 24%: £141,000 x 24% = £33,840.
By claiming the loft conversion, Elowen saved £7,200 in tax. She nearly forgot to include the cost but found her builder’s invoice just in time, highlighting the importance of good record-keeping.
Navigating CGT Improvements: Key Takeaways for 2025-26
Allowable improvements for Capital Gains Tax (CGT) in 2025-26 include capital expenditures that permanently enhance an asset’s value and remain at the time of sale.
Common qualifying improvements for properties include extensions, loft conversions, solar panels, and accessibility adaptations like ramps.
Routine repairs, maintenance, or temporary additions, such as repainting or portable furniture, do not count as deductible improvements.
Business owners can deduct improvements to assets like machinery or commercial properties if they boost value or functionality permanently.
For mixed-use properties, improvement costs must be apportioned based on the taxable portion, typically using floor space or market value.
Eco-friendly upgrades, like solar panels or insulation, qualify as improvements and may also benefit from VAT reductions.
Proper documentation, including receipts, invoices, and planning permissions, is essential to support improvement claims with HMRC.
The CGT annual exempt amount for 2025-26 is £3,000, making every deductible improvement critical to reducing tax liability.
CGT rates for 2025-26 are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers across most assets, including residential property.
Missing an improvement deduction can increase your tax bill, but you can amend your Self Assessment return within 12 months if errors are found.
FAQs
Q1: Can you claim CGT improvement costs if you sell a property you inherited?
A: Yes, you can claim improvement costs for an inherited property, but only for enhancements made after you inherited it. The base cost for CGT is the market value at the date of inheritance, and any qualifying improvements (e.g., extensions or permanent upgrades) you make can be deducted, provided they meet HMRC’s criteria and you have documentation.
Q2: Do improvements to a holiday home qualify for CGT deductions?
A: Yes, improvements to a holiday home, like adding a conservatory or upgrading the heating system, qualify if they enhance the property’s value and remain at the time of sale. Routine maintenance, such as redecorating, does not count.
Q3: Are improvement costs deductible if you sell a property at a loss?
A: No, improvement costs cannot be deducted if you sell at a loss, as CGT only applies to gains. However, you can use the loss, including improvement costs, to offset other gains in the same or future tax years, subject to HMRC rules.
Q4: Can you deduct the cost of planning permission for CGT purposes?
A: Yes, fees for planning permission directly related to a qualifying improvement, like an extension, can be deducted as part of the improvement cost. You must have evidence, such as invoices, to support the claim.
Q5: Do improvements to a property used for both business and personal purposes qualify fully for CGT deductions?
A: No, only the portion of improvement costs related to the business use of the property can be deducted. You must apportion costs based on the percentage of business use, typically determined by floor space or market value.
Q6: Are there any CGT exemptions for eco-friendly improvements in 2025-26?
A: There are no specific CGT exemptions for eco-friendly improvements, but costs for permanent upgrades like solar panels or insulation that enhance value are deductible. These may also qualify for VAT relief under separate HMRC rules.
Q7: Can you claim improvement costs if you sell shares instead of property?
A: Improvement costs typically apply to physical assets like property, not shares. For shares, you can deduct costs like broker fees or stamp duty, but there’s no equivalent for “improvements” unless related to specific business asset enhancements.
Q8: How do you prove an improvement qualifies for CGT deduction?
A: You must provide HMRC with receipts, invoices, contracts, or planning permissions showing the cost, date, and nature of the improvement. Photos or surveyor reports can also help demonstrate the enhancement’s permanence and value.
Q9: Can you deduct improvement costs if you sell a property abroad?
A: Yes, improvement costs for a property abroad can be deducted if you’re liable for UK CGT as a UK resident. The same rules apply: the improvement must be permanent, enhance value, and be supported by documentation.
Q10: Are there time limits for claiming improvement costs on a CGT return?
A: You must claim improvement costs when filing your CGT return, typically within 60 days for property sales or by 31 January after the tax year for other assets. Amendments can be made within 12 months of the filing deadline if you miss a cost.
Q11: Can you deduct improvement costs for a property held in a trust?
A: Yes, trustees can deduct improvement costs for trust-held assets, like property extensions, if they meet HMRC’s criteria. The trust’s annual exempt amount is £1,500 (or £3,000 for vulnerable beneficiaries) in 2025-26.
Q12: Do improvements to a leased property qualify for CGT deductions?
A: Yes, improvements to a leased property can qualify if they enhance the property’s value and remain at sale, but only if you’re liable for CGT on the lease disposal. Documentation and lease terms must support the claim.
Q13: Can you deduct the cost of professional advice for improvements?
A: Yes, fees for architects, surveyors, or engineers directly tied to a qualifying improvement, like designing an extension, are deductible. General advice or maintenance-related fees do not count.
Q14: Are there CGT deductions for improvements made before 2025-26?
A: Yes, improvements made in previous years can be deducted if they still enhance the asset’s value at the time of sale in 2025-26. You need records to prove the costs and their relevance to the sale.
Q15: Can you claim improvement costs if you’re a non-UK resident selling UK property?
A: Yes, non-UK residents liable for CGT on UK property disposals can deduct improvement costs, like extensions or eco-upgrades, if they meet HMRC’s rules and are supported by evidence.
Q16: Do improvements to a commercial property qualify differently from residential ones?
A: No, the same CGT rules apply: improvements to commercial properties must enhance value and remain at sale. However, business owners may also explore capital allowances, which cannot be claimed alongside CGT deductions.
Q17: Can you deduct improvement costs if you transfer an asset to a spouse?
A: No, transfers between spouses are treated as “no gain, no loss” for CGT purposes, so improvement costs aren’t deducted at transfer. The receiving spouse inherits the costs for future CGT calculations.
Q18: Are there any CGT reliefs tied to specific types of improvements?
A: No direct reliefs exist for specific improvements, but Business Asset Disposal Relief (BADR) may apply to business-related improvements, reducing CGT to 14% (rising to 18% in 2026-27) up to a £1 million lifetime limit.
Q19: Can you deduct improvement costs if you sell part of a property?
A: Yes, but you must apportion the improvement costs based on the part of the property sold. For example, if you sell half the land, only the relevant portion of improvement costs (e.g., a driveway) can be deducted.
Q20: Do improvements made during a temporary absence from a main residence qualify for CGT deductions?
A: If the property qualifies for Private Residence Relief, improvements made during a temporary absence may not be relevant, as the gain is likely exempt. If CGT applies (e.g., due to letting), qualifying improvements can be deducted.
About the Author
Mr. Maz Zaheer, FCA, AFA, MAAT, MBA, is the CEO and Chief Accountant of My Tax Accountant and Total Tax Accountants—two of the UK’s leading tax advisory firms. With over 14 years of hands-on experience in UK taxation, Maz is a seasoned expert in advising individuals, SMEs, and corporations on complex tax matters. A Fellow Chartered Accountant and a prolific tax writer, he is widely respected for simplifying intricate tax concepts through his popular articles. His professional insights empower UK taxpayers to navigate their financial obligations with clarity and confidence.
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