Understanding Capital Gains Tax: How inflation impacts your asset sales

How does CGT treat inflation?

For example, if I bought an asset in 1990 and since then the cost of living has increased by five times, would selling the asset for £25,000.00 in 2025, which originally cost £5,000.00, be considered a zero capital gain?

According to the HMRC Capital Gains Manual, the basic principle of indexation is that a deduction is made in the computation of capital gains to account for inflation. However, indexation relief was abolished for individuals on 6th April 2008, and therefore is no longer available. Different rules may apply for corporate entities.

For individuals, the capital gain is calculated based on the difference between the sale price and the original purchase price without adjusting for inflation. Therefore, in your example, this would NOT be considered a zero capital gain. Instead, the £20,000 profit on the asset sale would require paying Capital Gains Tax.

There is a Capital Gains tax-free allowance for individuals every year, although this has reduced significantly in recent years. The current tax-free allowance is £3,000, dropping from £6,000 in 2023/2024 and £12,300 in 2022/2023.