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What is capital gains tax and how does it work?
The government rakes in billions of pounds from capital gains tax each year. 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 limelight in recent years following major fiscal changes, including the threshold at which you have to start paying it.
Previously, you could make £12,300 per financial year in capital gains before having to pay tax, but this allowance has been steadily reduced. It was cut to £6,000 in 2023 and to £3,000 in April 2024, where it has remained since.
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The CGT rate you pay in the UK depends on your income tax band and when you realised the gain, for example by selling an asset.
The main capital gains tax rate
Basic rate taxpayers pay 18% on gains, while higher and additional rate taxpayers pay 24%. These new rates were announced in the 2024 Autumn Budget and kicked in immediately.
Basic rate taxpayers previously paid 10% and higher rate taxpayers paid 20%. The new rates have continued into the 2026/27 tax year.
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.
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Capital gains tax rates
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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 may be due on the gain made based on the full market value.
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.
While the UK tax year runs from 6 April to 5 April, the deadline to pay CGT is the following 31 January, which is the self-assessment deadline. For example, if you made a gain in the 2025/26 tax year, you need to pay it by 31 January 2027.
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 2026/27 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.
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There are a number of CGT exemptions, in addition to your main residence and CGT 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, if they sell for less than £6,000.
If you sell something worth £6,000 or more and make a gain of more than £3,000 (your tax exempt limit) 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.”
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: “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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