What improvements are allowed for Capital Gains Tax (UK)? | 2026/27 Guide

When advising clients on the disposal of capital assets, correctly calculating the base cost is critical to ensuring they do not overpay tax. Following the introduction of the unified 18% basic rate and 24% higher rate for residential property gains under the Finance Act 2025, which remain in force for the 2026/27 tax year, maximising allowable capital deductions directly saves clients significant tax.

To accurately answer what improvements are allowed for Capital Gains Tax, practitioners must rely on the statutory rules governing “enhancement expenditure” and correctly distinguish capital improvements from revenue repairs.

The Statutory Test for Enhancement Expenditure

Section 38(1)(b) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) sets out the exclusive statutory test for allowable improvements. To deduct improvement costs from the final capital gain, the expenditure must meet three strict criteria.

“(b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset, being expenditure reflected in the state or nature of the asset at the time of the disposal…”

The Enduring Benefit Requirement

Crucially, the improvement must be “reflected in the state or nature of the asset at the time of the disposal”.  If the client incurs expenditure that proves futile or wastes away before the sale (for example, constructing a conservatory and subsequently demolishing it before selling the house), HMRC will deny the deduction.

Lord Emslie confirmed this strict test in Aberdeen Construction Group Ltd v CIR, ruling that the legislation requires “an identifiable change for the better in the state or nature of the asset”.

Capital Improvements vs Revenue Repairs

You cannot deduct general maintenance or repair costs for Capital Gains Tax purposes. Section 39 of TCGA 1992 expressly excludes any expenditure that would be allowable as a revenue deduction against income profits.  Whether a specific work constitutes a repair or an improvement is a question of fact and degree.

• Repairs (Not Allowable for CGT): If the work simply restores the asset to its original condition, it is a repair and treated as a revenue expense.
• Improvements (Allowable for CGT): If the work alters or enhances the asset, allowing it to do something it could not do before, it constitutes a capital improvement.  Extending a showroom or building an entirely new internal wall constitutes an allowable capital improvement.

The Changing Technology Rule

HMRC actively updates its interpretation of improvements based on modern building standards. Work that once qualified as an improvement may now merely qualify as a repair.

• Double Glazing: Replacing single-glazed windows with double-glazed windows is no longer considered an improvement for CGT purposes. Because double glazing is now the industry standard, HMRC treats this as a standard repair (replacing like with currently available like).
• Secondary Glazing: Conversely, installing a secondary glazing unit behind an existing window to improve insulation fundamentally changes the fabric of the building and counts as an allowable alteration/improvement.
• Modern Materials: Replacing old wooden support beams with modern steel girders is treated purely as a repair, provided the floor simply regains its original load-bearing capacity rather than gaining new functional strength.

The Exception for Dilapidated Properties

A major exception exists for properties acquired in a derelict or highly run-down state. If a client purchases a dilapidated property, the initial expenditure incurred in repairing and decorating it to make it fit for letting is often inadmissible as a revenue deduction against their property income.

In these specific circumstances, because the costs cannot be deducted from income tax, HMRC permits the entire initial restoration cost to be claimed as capital enhancement expenditure under section 38(1)(b) of TCGA 1992.

Strict Exclusions: What You Cannot Deduct

When reviewing a client’s spreadsheet of project costs, you must strike out the following claims:

• The Value of Own Labour: A client cannot deduct a notional cost for their own time or DIY labour spent improving the property. In Oram v Johnson, the court firmly established that only actual out-of-pocket costs for materials and third-party professional services are allowable.
• Notional Repairs: A client cannot claim a deduction for what it would have cost to repair an item if they instead completely replaced it.

Incidental Costs of Acquisition and Disposal

Alongside physical improvements under section 38(1)(b), practitioners must also capture all allowable incidental costs under sections 38(1)(a) and 38(1)(c).

Allowable incidental costs are strictly limited by statute to:

• Professional Fees: Fees paid for the services of a surveyor, valuer, auctioneer, agent, or legal adviser.
• Taxes and Transfer Costs: Stamp Duty Land Tax (SDLT) or equivalents paid on the acquisition.
• Advertising: Costs incurred in advertising to find a buyer or a seller.
• Accountancy Fees: Accountancy fees are only allowable to the extent that they relate to ascertaining the market value of the asset or making a required apportionment. You cannot deduct accountancy fees incurred simply for computing the client’s Capital Gains Tax liability.

Summary: Allowable vs Disallowable CGT Expenditure

Next steps for research: Verify if the client received any capital allowances on the improvements during their period of ownership, as section 41 of TCGA 1992 restricts capital losses where expenditure has already qualified for capital allowances.