What is the difference between este, ese and aquel?

They mark three distances. Este is near the speaker (this one, here by me), ese is near the listener or a middle distance (that one, by you), and aquel is far from both speaker and listener (that one over there). English collapses ese and aquel into a single that, which is why learners under-use aquel. If the thing is across the room or far in time, reach for aquel.

When do I use esto, eso and aquello?

Use the neuter forms - esto, eso, aquello - when you are pointing at an idea, a whole situation, or a thing you cannot yet name. ¿Qué es esto? (What is this?) asks about an unidentified object. Eso no es verdad (that is not true) refers to a statement, not a noun. The neuter forms never change for gender or number and they never carry a written accent, because there is no adjective form to confuse them with.

Does the demonstrative pronoun still take an accent?

Not any more, as a rule. The RAE ruled in 2010 that the written accent on este, ese, aquel and their forms is optional even when they work as pronouns. Older textbooks write éste, ése, aquél to mark the pronoun apart from the adjective; current guidance is to drop it. You will still see the accented spellings in older texts and they are not wrong, just no longer required.

Demonstrative Pronouns

A demonstrative points at something: this book, that car, that house over there. Spanish does this with three words where English has two, and the gap is exactly where English speakers slip.

The three-way system

English has a two-way split: near (this) and not-near (that). Spanish has three:

este - near me, the speaker. This one, here.
ese - near you, the listener, or a middle distance. That one, by you.
aquel - far from both of us, in space or in time. That one over there.

The third slot, aquel, has no clean English equivalent, so learners squash it into "that" and never use it. Train yourself to reach for aquel whenever the thing is genuinely far off, or far back in time.

Adjective or pronoun?

The same words do two jobs.

As an adjective, the demonstrative sits in front of a noun: este libro (this book), esa casa (that house), aquellos coches (those cars over there).

As a pronoun, it stands in for the noun, which has already been mentioned: Quiero este (I want this one), Prefiero ese (I prefer that one), Me gusta aquel (I like that one over there). The pronoun still agrees in gender and number with the noun it replaces.

¿Qué libro quieres? Este. (Which book do you want? This one.)
No me gusta esa camisa, prefiero aquella. (I don't like that shirt, I prefer that one over there.)

The full table

The forms change for gender and number, exactly as adjectives do. The neuter row at the bottom is the odd one out.

Distance	Masc. sing.	Fem. sing.	Masc. pl.	Fem. pl.	Neuter
near me	este	esta	estos	estas	esto
near you	ese	esa	esos	esas	eso
over there	aquel	aquella	aquellos	aquellas	aquello

A trick worth keeping: the te in es-te points to tú (you, near), and the a in aquel points further away. Wobbly, but it sticks.

The neuter: esto, eso, aquello

The neuter forms - esto, eso, aquello - do not replace a specific noun. They point at an idea, a whole situation, or a thing you cannot name.

¿Qué es esto? (What is this?) - you don't know what the object is, so no gender to agree with.
Eso no es verdad. (That is not true.) - "that" is a statement, not a thing.
Aquello fue un desastre. (That was a disaster.) - "that" is a past event seen from a distance.

The neuter forms never take a written accent, and they never change for gender or number. There is nothing for them to agree with.

The accent: now optional

This is the part the old textbooks get wrong. For decades, the rule was to put a written accent on the pronoun - éste, ése, aquél - to tell it apart from the adjective. In 2010 the RAE (Real Academia Española) ruled that this accent is optional, because context already makes the meaning clear.

Old style: Quiero éste. (I want this one.)
Current style: Quiero este. (I want this one.)

Both are accepted. Current guidance is to drop the accent. The neuter forms - esto, eso, aquello - never carried an accent in the first place, so nothing changes there. If you see éste in an older novel, it is not a typo; it is the pre-2010 convention.

Worked examples

Este es mi coche; aquel es el tuyo. (This one is my car; that one over there is yours.) - two cars at different distances.
De todos los pisos, ese es el mejor. (Of all the flats, that one is the best.) - the flat near the listener, or one just mentioned.
No quiero hablar de eso. (I don't want to talk about that.) - neuter, because "that" is a topic, not a thing.
Aquellos días fueron felices. (Those days were happy.) - aquel for time far back.

Common mistakes English speakers make

Skipping aquel. The biggest one. Because English has no third word, learners use ese for everything that is not right next to them. If the thing is across the room, far down the street, or years ago, it is aquel.

Using a gendered form for an idea. "What is this?" about an unknown object is ¿Qué es esto?, never ¿Qué es este? When there is no noun to agree with, you need the neuter.

Adding the accent out of habit. If a textbook drilled éste into you, you can let it go. The plain spelling is now correct, and the neuter forms never took an accent anyway.