The 2025/2026 tax year represents a significant turning point for UK investors, high-net-worth individuals, and business owners. Years of progressive reductions to the tax-free threshold for investment profits have culminated in an unprecedented exposure to capital gains taxation. This shift mandates proactive and sophisticated tax planning, where the strategic use of UK capital allowances becomes the most powerful legal mechanism for business-owning taxpayers to manage their overall liability.
Capital Gains Tax (CGT) is levied on the profit realized when an individual or trust disposes of an asset (such as shares, second homes, or valuable collectibles) that has increased in value. Conversely, what are capital cost allowances? They are a form of statutory tax relief available to businesses for expenditure on certain capital assets, such as plant and machinery. In essence, capital allowances take the place of accounting depreciation, which is not permitted as a deduction for tax purposes, allowing businesses to write off the cost of these assets against their taxable income.
The urgency for sophisticated planning stems from the aggressive reduction of the Annual Exempt Amount (AEA). Over the last three years, the AEA, which represents the capital gains tax exemption UK limit, has been dramatically curtailed, descending from £12,300 to just £3,000 for the 2025/2026 tax year. This sharp decrease means that casual investors who previously remained outside the CGT net will now be drawn in, necessitating tax planning where it was once optional.
The low UK capital gains tax threshold now requires individuals to realize a gain of only £3,001 before tax is due. This compels taxpayers to implement mandatory annual strategies, such as loss of harvesting and spousal transfers, much earlier in the financial cycle than in previous years. The necessity to maximize deductions through mechanisms like the complete capital allowance system for businesses, or through careful management of personal reliefs, is now critical to mitigating the heightened tax risk.
The cornerstone of CGT planning in the 2025/2026 tax year is the drastically reduced threshold. The capital gains tax yearly allowance (AEA) for individuals, personal representatives, and trustees for disabled people is definitively set at £3,000. For other trusts, this allowance is concurrently reduced to £1,500.
This allowance is paramount as it dictates the limit of tax-free gains an individual can realize in any given year. Taxpayers must utilize this CGT allowance for individuals against gains charged at the highest applicable rates first. This approach maximizes the tax benefit of the exemption, ensuring the highest marginal tax percentages are relieved before applying the lower rates.
The rapid decline in the personal capital gains tax allowance over a short period underscores the new compliance challenge:
| Tax Year | AEA for Individuals | AEA for Other Trusts | Key Implication for 2025/26 |
|---|---|---|---|
| 2025/2026 | £3,000 | £1,500 | Sharp increase in taxpayer exposure; focus on CGT allowance for individuals required |
| 2024/2025 | £3,000 | £1,500 | Continuation of the initial reduction |
| 2023/2024 | £6,000 | £3,000 | Transitional reduction year |
| 2022/2023 | £12,300 | £6,150 | Highest allowance in recent history |
The rate at which CGT is paid depends on the taxpayer’s overall taxable income. Taxable gains are added to an individual’s taxable income (income minus the Personal Allowance and any reliefs) to determine the applicable rate band.
For the 2025/2026 tax year, the following rates apply for individuals:
The ability to control the overall level of taxable income is thus intimately connected to CGT mitigation. For a higher-rate taxpayer, realizing a gain that is taxed at 24% (for residential property) compared to 18% (basic rate) represents a significant increase in liability.
This connection creates a direct financial incentive to reduce taxable income through other means. If a taxpayer’s income level means they straddle the basic/higher rate threshold, reducing business profits via maximizing capital allowance rates or increasing pension contributions can shift a portion of the gain into the lower tax band. By claiming maximum reliefs, such as through full expensing capital allowances (for companies) or the Annual Investment Allowance (AIA) for sole trader capital allowances users, the business profit component of taxable income can be substantially lowered, potentially saving six percentage points on the portion of the gain that would otherwise be taxed at the higher rate.
The system of granting tax relief for capital expenditures is formalized under the Capital Allowances Act 2001 (CAA01). This legislation enables businesses ranging from limited companies to the self-employed to write off the cost of qualifying capital assets against their taxable income. This relief covers expenditure on various items, including plant and machinery (P&M), research and development, and specific non-residential buildings.
When businesses acquire qualifying assets, they group the expenditure into different “pools” to determine the appropriate capital allowance rates.
A vital area of relief, often overlooked, is expenditure on embedded property assets. Integral features of capital allowances relate to components that are essential for the functioning of a building but are categorized separately from general P&M.
The capital allowances integral features defined by CAA01 include:
These elements typically fall into the 6% Special Rate Pool, but if they are new and used assets (for companies claiming Full Expensing) or fall within the £1 million limit (for all businesses claiming AIA), they can attract 100% relief.
For commercial property owners, recognizing the inherent capital allowances embedded within the purchase price is critical. Without specialist intervention to conduct a detailed survey, these costs are often mistakenly included in the non-tax-deductible property cost. The ability to identify, quantify, and claim capital allowances on these integral features is paramount, as it converts a portion of the non-allowable acquisition cost into an immediate, tax-deductible expense. This substantial reduction in corporate or income tax liability frees up significant retained profit or personal cash flow, which can indirectly offset the personal burden created by the reduced capital gains tax yearly allowance.
The period leading up to 2025 saw significant shifts in business tax relief. The temporary super deduction capital allowances (130% first-year relief), which ran until March 2023, were replaced by the permanent full expensing capital allowance (FE).
FE is one of the most generous tax reliefs available, providing a 100% deduction for new and unused main-rate P&M expenditure in the year it is incurred. For Special Rate assets, which include integral features of capital allowances, the equivalent allowance is a 50% first-year deduction.
The permanence of the full expensing capital allowance makes it a powerful long-term planning tool for capital gains tax for business owners who operate limited companies, allowing substantial investment costs to be written off immediately against profits.
While FE is highly valuable, its applicability is strictly limited. A full capital expensing allowance is exclusively available to companies subject to Corporation Tax. It is not available to unincorporated businesses, including sole traders, partnerships, or LLPs.
Unincorporated businesses rely instead on the Annual Investment Allowance (AIA). The AIA permits all UK businesses, including those utilizing sole trader capital allowances, to deduct 100% of the cost of qualifying P&M up to an annual limit of £1 million.
For the self-employed and partnerships, the AIA provides the same 100% relief as FE, provided the expenditure remains below the £1 million cap. A key benefit of the AIA over FE is that it can be claimed on second-hand P&M, whereas FE is restricted to new and unused assets. Therefore, sole trader capital allowance users have significant scope to achieve a complete capital allowance deduction without relying on new assets.
| Allowance Type | Rate/Limit | Eligible Entities | Qualifying Asset Type | Key Restriction/Note |
|---|---|---|---|---|
| Full Expensing (FE) | 100% (Main Rate) / 50% (Special Rate) | Companies (Corporation Taxpayers) | New and Unused P&M | Unavailable to sole trader capital allowances |
| Annual Investment Allowance (AIA) | 100% (Up to £1 million) | All UK Businesses | New and Second-Hand P&M | Prorated for short accounting periods |
| Writing Down Allowance (WDA) | 18% (Main Pool) / 6% (Special Rate) | All UK Businesses | Expenditure remaining after FYAs | Claims spread over asset life; standard capital allowance rates |
The generosity of 100% upfront relief, whether via FE or AIA, carries a potential risk upon disposal: the capital allowances balancing charge.
When a business sells, scraps, or disposes of an asset for which 100% complete capital allowance relief was claimed, the asset’s tax written-down value (TWDV) is often zero. If the disposal proceeds exceed this zero TWDV, the excess amount is treated as a balancing charge of capital allowances adjustment. This charge is added back to the company’s taxable profit, effectively recapturing the initial tax relief that was granted.
This mechanism means businesses must carefully manage the timing of asset disposals. A large, unexpected balancing charge can significantly inflate taxable profits in one year, potentially increasing the overall Corporation Tax burden. Business owners using full expensing capital allowances should plan to offset future balancing charges either by spreading disposals over multiple accounting periods or by making new, offsetting capital investments in the same period to manage their CT exposure effectively.
For individuals seeking sophisticated methods on how to reduce capital gains tax legally, a multi-faceted approach involving statutory deductions, strategic timing, and utilizing tax wrappers is necessary.
The fundamental calculation for CGT is: (Proceeds) – (Cost Base + capital gains allowable expenses) = Gain. By maximizing the allowable expenses, the taxable gain is minimized.
It is crucial to note that normal maintenance costs (like decorating or routine repairs) and costs incurred for financing the asset (e.g., mortgage interest) are explicitly not allowed as CGT deductions.
The capital gains tax indexation allowance was historically available to corporations to adjust the cost base of assets for the effects of inflation. However, this allowance was effectively frozen for individuals in 1998 and ceased entirely for corporations in 2017. While it is no longer relevant for calculating the gain on assets acquired recently, it remains pertinent when dealing with assets owned before 31 March 1982. In such cases, special rules allow the taxpayer to use the market value on that date instead of the original purchase cost, which often significantly reduces the recorded gain.
One of the most effective ways to mitigate the tax burden resulting from the reduced £3,000 capital gains annual allowance is through strategic timing:
For business owners, the ultimate reduction strategy involves utilizing the claim capital allowances mechanism. While capital allowances are deducted from trading profits (Income Tax or Corporation Tax), the reduced profit base means a lower overall taxable income for the individual.
When claiming CAs, particularly where complete capital allowance has been utilized, the subsequent sale of the asset will likely trigger a capital allowance balancing charge, recapturing the relief against the business’s taxable profit. The rules for calculating a balancing adjustment are contained within the HMRC capital allowances manual and depend heavily on the asset’s original pool and its tax-written-down value at the time of disposal.
All claims for capital allowances must be substantiated by capital expenditure used in a qualifying trade and adhere strictly to the Capital Allowances Act 2001. The definitive source of official interpretation and guidance is the HMRC capital allowances manual, which provides the detailed methodology for calculating allowances and managing complex situations. For example, the manual provides specific guidance clarifying the position on claims related to software and improvements when utilizing the full expensing capital allowance.
For businesses to claim capital allowances accurately, they must follow specific reporting procedures:
Crucially, First-Year Allowances (including AIA, FE, and certain enhanced capital allowances) must be claimed in the accounting period in which the item was purchased. Furthermore, the AIA limit is subject to pro-rating if the accounting period is shorter than 12 months (e.g., a 9-month period limits the AIA to £750,000).
Compliance also involves accurately accounting for the capital allowances balancing charge upon disposal of an asset. This mechanism is designed to prevent a business from benefiting from excess relief.
If a business has claimed a complete capital allowance (100% deduction via AIA or FE) and the asset is sold for significant proceeds, the entire disposal amount will be added back as a balancing charge capital allowances adjustment to the business’s taxable profits. The rules for calculating the balancing charge are non-negotiable and are overseen by HMRC. Business owners must maintain robust records of the asset’s original cost, any allowances claimed, and the tax-written-down value to ensure accurate reporting and build trust with HMRC.
For assets used partly outside the business, particularly relevant for capital allowances self-employed and sole trader capital allowances users, the claimable allowance must be reduced proportionally, adding another layer of compliance complexity. Accurate documentation, as detailed in the HMRC capital allowances manual, is essential to support these claims and deductions.
At Lanop Business and Tax Advisors, we work closely with business owners and self-employed professionals to help them manage their overall tax liability through strategic use of capital allowances and capital gains tax reliefs. During the 2025/2026 tax year, several of our clients benefited significantly from structured planning around the new capital gains tax yearly allowance and the introduction of the full expensing capital allowance.
“ I never realised capital allowances could affect my personal tax bill. Lanop showed me how to use them to cut both Corporation Tax and Capital Gains Tax legally. It saved us more than any investment return this year.”
Below are two examples that demonstrate how our team handled these cases to deliver measurable results while maintaining full compliance with HMRC.
One of our corporate clients, a mid-sized manufacturing company, approached Lanop with projected taxable profits of around £750,000 for the year ending December 2025. The directors planned to invest £300,000 in new production machinery but wanted to ensure the investment was tax-efficient under the latest rules.
After a detailed review, our team identified that the company qualified for the full expensing capital allowance (FE) on its plant and machinery expenditure. We prepared the claim and ensured that the entire £300,000 investment was treated as 100% deductible in the same accounting period.
Following our advice, the company’s taxable profit was reduced from £750,000 to £450,000, generating a substantial Corporation Tax saving and improving cash flow.
By claiming a complete capital allowance to be deducted upfront, the company maximized the immediate value of the tax benefit and strengthened its financial position.
We also provided guidance on profit distribution and future planning to align the company’s retained earnings with the director’s personal capital gains tax allowance strategy. This allowed the directors to optimize both corporate and personal tax efficiency, ensuring long-term sustainability and compliance.
Another client, a self-employed architect, approached us with projected trading profits of £120,000 for 2025 and an expected £25,000 capital gain from selling a small investment portfolio. The client also planned to purchase £75,000 worth of new and second-hand equipment for their business and wanted to understand how to balance investment, income, and capital gains in one tax year.
Our Approach
Lanop’s advisory team carried out a comprehensive tax simulation to assess how the Annual Investment Allowance (AIA) could work alongside the client’s capital gains position.
We advised the client to claim 100% relief on the £75,000 purchase under the AIA, which was well within the £1 million annual limit. We also ensured that all qualifying assets, including second-hand items, were properly categorized for maximum capital allowance rates.
As a result of this strategy, the client’s taxable income was reduced from £120,000 to £45,000. After applying for the Personal Allowance of £12,570, their taxable income became £32,430. The remaining £22,000 of taxable capital gains, after applying the personal capital gains tax allowance, stayed within the basic rate band, reducing the CGT rate from 20% to 10%.
Through this planning, the client not only reduced both Income Tax and Capital Gains Tax but also created additional flexibility for future investments. Our work ensured full compliance with the Capital Allowances Act 2001 and the HMRC capital allowances manual, while achieving significant savings across multiple tax heads.
your total gains for the year are below the capital gains tax yearly allowance, you usually don’t need to pay tax. However, you may still need to report your gains to HMRC if the total proceeds from selling assets exceed the reporting threshold or if you’re already registered for Self-Assessment. It’s always wise to keep accurate records in case HMRC requests further details.
For the 2025/2026 tax year, the capital gains tax allowance (also called the Annual Exempt Amount) in the UK is £3,000 for individuals and £1,500 for most trusts. This reduction means more people will now fall within the UK capital gains tax threshold. Taxpayers should plan disposals carefully and consider strategies such as spousal transfers or offsetting capital losses to stay below this tighter exemption limit.
You must pay Capital Gains Tax (CGT) if you’re a UK resident who sells or disposes of assets like property, shares, or valuable personal items that have increased in value. Both individuals and business owners can be liable. Companies pay CGT through Corporation Tax, while individuals report through Self-Assessment. It’s important to calculate gains accurately and apply any capital gains tax, personal allowance, or reliefs you qualify for.
You can legally reduce your CGT bill by using allowable deductions and making full use of the capital gains tax personal allowance. Strategies include offsetting capital losses, transferring assets to a spouse, investing through tax-efficient wrappers like ISAs or pensions, and claiming capital allowances on qualifying business expenses. Effective use of full expensing capital allowances or Annual Investment Allowance (AIA) can also lower taxable income, indirectly reducing your overall CGT exposure.
Some assets are fully or partially exempt from Capital Gains Tax in the UK. Common examples include personal cars, items sold for under £6,000, assets held in ISAs or pensions, and your main home (if it qualifies for Private Residence Relief). Certain business assets may also qualify for Business Asset Disposal Relief. Understanding which exemptions apply helps ensure you only pay CGT on taxable assets and not on everyday possessions.
Yes, businesses can claim relief on gains through capital allowances or other HMRC-approved mechanisms. For example, companies can use the full expensing capital allowance to deduct 100% of qualifying equipment costs, reducing taxable profits and indirectly lowering their exposure to capital gains tax for business owners. Reliefs like rollover relief or Business Asset Disposal Relief may also apply, helping companies reinvest gains into new assets while deferring tax liability.
Payment deadlines for Capital Gains Tax depend on the asset type. For residential property sales, you must report and pay any CGT within 60 days of completion. For other assets, payment is due by 31 January following the tax year’s end through Self-Assessment. It’s crucial to maintain accurate records of purchase and sale costs to calculate your gain correctly and meet HMRC’s reporting requirements on time.
Yes, you can offset capital losses against your capital gains to reduce the amount of tax you owe. Losses must be reported to HMRC, even if your gains fall below the yearly capital gains tax allowance. You can carry unused losses forward to offset future gains, provided they’re recorded within four years of the loss year. This approach ensures you don’t overpay CGT in subsequent financial years.
Absolutely. Consulting with a qualified tax advisor before selling assets ensures you understand your capital gains tax obligations and available reliefs. A professional can identify opportunities to apply capital allowances, use allowable expenses, and legally reduce your CGT through timing and structuring. At Lanop, we specialize in helping individuals and business owners plan asset disposals efficiently, ensuring every decision aligns with current HMRC rules and long-term financial goals.
The substantial reduction in the capital gains annual allowance to £3,000 for the 2025/2026 tax year demands urgent and comprehensive planning from all UK taxpayers. While the UK capital gains tax threshold has dropped, increasing the exposure of casual investors, capital gains tax for business owners and the self-employed can be mitigated effectively and legally through the rigorous deployment of UK capital allowances.
Companies benefit from the permanent full expensing capital allowance for new assets, providing powerful cash flow advantages, while sole trader capital allowance users can utilize the generous £1 million Annual Investment Allowance, which uniquely covers second-hand assets.
By implementing these strategies and maintaining accurate records as stipulated in the HMRC capital allowances manual, taxpayers can successfully and legally reduce their CGT liability in this new, more restrictive tax environment.
Aurangzaib Chawla is a UK-based tax advisor and Managing Partner at Lanop Business & Tax Advisors.
With nearly two decades of experience, he supports individuals, landlords, and SMEs with proactive tax planning and compliance. Known for simplifying complex tax legislation, Zaib helps clients minimise liabilities while building sustainable, tax-efficient strategies for long-term success.
Aurangzaib Chawla is a UK-based tax advisor and Managing Partner at Lanop Business & Tax Advisors. With nearly two decades of experience, he supports individuals, landlords, and SMEs with proactive tax planning and compliance. Known for simplifying complex tax legislation, Zaib helps clients minimise liabilities while building sustainable, tax-efficient strategies for long-term success.
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At Lanop, I am providing my services as the Managing Partner and Tax Specialist. My expertise includes helping medium and small-scale businesses in their accountancy and legal requirements, business start-up support, strategic review, payroll system review and implementation, VAT and tax compliance to cloud accounting. I am also an expert in financial reporting, identifying and monitoring risks, strategic business development, client retention, market acquisition and deals closure by carefully planning my sales cycle.
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