What is capital gains tax and how does it work?
The government rakes in billions of pounds from capital gains tax. But how does the tax work, and when do you pay it?
Capital gains tax (CGT) is a tax paid on profits made from assets like shares, property and other investments.
It’s a tax that’s been in the spotlight in recent years following major changes to the rate at which you pay it and when you have to start paying it.
In the past, you could make £12,300 per financial year in capital gains before having to pay tax, but this allowance has been reduced. It was cut to £6,000 in 2023 and to £3,000 in 2024.
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Meanwhile, CGT rates were raised in the October 2024 Budget – the rate went up from 10% to 18% for basic-rate taxpayers and from 20% to 24% for higher-rate taxpayers.
What are the capital gains tax rates in the UK?
The CGT rate you pay in the UK depends on your income tax band and when you realised the gain.
The main capital gains tax rate
Since 30 October 2024, basic-rate taxpayers have paid 18% on gains, while higher and additional-rate taxpayers have paid 24%. These new rates were announced in the 2024 Autumn Budget and kicked in immediately. They have continued into the 2025/26 tax year.
Prior to this date, the rates were 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers.
Capital gains tax rates on residential property
The CGT rates for residential property are 18% and 24% for basic-rate and higher/additional-rate payers, respectively.
This means the main rates and the residential property rates are now the same. You do not have to pay CGT on your main residence, but you will be charged on second homes like holiday homes and buy-to-lets.
| Row 0 - Cell 0 | Residential property | All other chargeable assets |
Basic-rate taxpayers | 18% | 18% |
Higher-rate and additional-rate taxpayers | 24% | 24% |
When do you pay capital gains tax?
CGT may be due when you sell an asset for a profit, such as shares held outside an ISA wrapper or a buy-to-let property.
You can also trigger a CGT bill when giving an asset away to anyone other than a spouse or civil partner. The gain it has made since you bought it will normally be assessed for capital gains tax purposes. If the assets you have given away have gained value over the £3,000 threshold, you will most likely have to pay tax.
Some people hope to get around capital gains tax by selling something for less than it's worth, such as a second property. However, in these circumstances, CGT will be due on the gain made based on the full market value, according to the investment platform Hargreaves Lansdown.
Crypto investors should also watch out for a potential CGT bill, as selling or spending it (when the value has increased) is classed as a capital gain.
It’s important to keep records of your transactions so you can calculate any capital gains tax owed when filing your annual self-assessment tax return.
How to calculate capital gains tax
To calculate your CGT liability, first work out your taxable gain by subtracting the price you bought the asset for from the sale price. Then, deduct your CGT allowance (£3,000 for the 2025/26 tax year) from this gain. The remaining amount may be subject to CGT at the rate based on your tax band and the asset type. For more detailed guidance on calculating CGT, visit the government website at gov.uk.
For example, let’s say you’re a higher-rate taxpayer and you made a £10,000 gain from selling shares this week. In this scenario, you’d pay £1,680 in CGT on your gains (24% of £7,000), after deducting your £3,000 annual tax-free allowance.
What are the CGT exemptions?
There are a number of CGT exemptions, in addition to your main residence and annual allowance.
One is the ability to transfer assets to your spouse or civil partner without being subject to this tax. This effectively allows you to give assets to your partner to double your CGT allowance if both partners use their individual allowances.
Another important exemption applies to investments held within individual savings accounts (ISAs) and pensions. These investment wrappers are designed to be tax-efficient, so any gains made within them are exempt from CGT.
Charitable donations of assets such as shares or property are also exempt from CGT, offering a way to support causes you care about while potentially reducing your tax bill.
CGT is not payable on personal belongings (“chattels”), such as jewellery, paintings and antiques, where the sale proceeds are less than £6,000.
That said, Hargreaves Lansdown points out that if you sell something worth £6,000 or more and make a gain of more than £3,000, you may have to pay CGT.
Sean McCann, chartered financial planner at NFU Mutual, added: “Other exempt assets include gilts, foreign currency held for your use, and private motor cars including vintage passenger cars.”
How can you reduce your capital gains tax bill?
You can reduce your CGT bill in several ways.
Spread gains across tax years
Similar to ISA allowances, the CGT annual £3,000 tax-free allowance operates on a ‘use it or lose it’ basis meaning it doesn’t roll over from one tax year to the next.
So, you could split the sale of assets between separate tax years to benefit from multiple tax-free allowances.
Aidan Edgerton, financial planner at wealth manager Rathbones, said: “You could sell part of your investment on 5 April and the remainder on 6 April – the start of the new tax year.”
Use losses to offset gains
Investments or assets sitting at a loss aren’t always a bad thing – you can actually use them to offset any gains you’ve made to keep your overall gains under the £3,000 annual allowance.
Edgerton said: “Capital losses can be used to offset gains elsewhere, reducing your overall tax liability. It’s a simple but effective way to make the most of a less-than-ideal situation.”
Use ‘Bed and ISA’ or ‘Bed and SIPP’
You can move investments into an ISA or Self-Invested Personal Pension (SIPP) to shield them from CGT through a process known as ‘Bed and ISA’ or ‘Bed and SIPP’, said Laura Suter, director of personal finance at investment platform AJ Bell.
The move involves selling assets then buying them back within a tax-wrappered ISA or SIPP.
Do note, because transferring investments in this way is classed as selling, it can trigger a CGT bill. However, you can offset the sale of any profit-making investment with a loss-making one to stay within the £3,000 tax-free annual allowance.
Invest in an EIS (Enterprise Investment Scheme)
Wealthy investors making gains on investments in an EIS (Enterprise Investment Scheme) can benefit from generous tax reliefs.
Investments in an EIS are free from CGT if held for three years or more. You can also delay CGT if you sell EIS investments within three years but invest the proceeds into another qualifying scheme.
However, note that EISs are risky as they invest in small companies, so it’s not advisable to invest purely for the tax breaks alone.
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