Capital gains tax (CGT) is a tax paid on profits from the sale of assets, such as shares, property and other investments.
As allowances have been cut in recent years, CGT is set to affect more UK investors. The tax-free allowance on capital gains was reduced from £12,300 to £6,000 in April 2023, and slashed again to just £3,000 from April 2024.
With shrinking allowances and frozen income tax thresholds, more people are becoming subject to CGT. Chancellor Rachel Reeves also increased CGT rates in the Autumn Budget, making the tax burden greater still.
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Against this backdrop, we take a closer look at the tax. What is capital gains tax, when do you pay it, and how can you reduce the amount you owe?
What are the CGT rates in the UK?
The CGT rate you pay in the UK depends on your income tax band and when you realised the gain.
- Main rates as of 30 October: As of 30 October 2024, basic-rate taxpayers pay 18% on gains, while higher and additional-rate taxpayers pay 24%. These new rates were announced in the Autumn Budget and kicked in immediately.
- Main rates before 30 October: Any gains realised prior to this point in the 2024/25 tax year will be taxed at the old rates – 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers.
- Rates on residential property: Reeves did not change the CGT rates for residential property, so these remain the same at 18% and 24% respectively. This means the main rates and the residential property rates are now in line with one another. You do not have to pay CGT on your primary residence, but you will be charged on second homes like buy-to-lets and holiday homes.
The above rates only apply to the portion of your gains that exceed the tax-free allowance, known as your annual exempt amount, which is set at £3,000 from 6 April 2024. So, you only pay CGT on gains above this threshold.
Sean McCann, chartered financial planner at NFU Mutual, says: “A growing number of people are finding themselves caught in the capital gains net when they sell or give away shares, property, or other taxable assets.
“This is having a significant impact on many shareholders who realise modest gains each year to enhance their income who are finding themselves with a tax bill’’.
When do you pay CGT?
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. But capital gains isn't payable on your main residence, so you don't pay this tax when you sell your home.
The amount you pay depends on your income tax bracket, and 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 your CGT
To calculate your CGT liability, first work out your taxable gain by subtracting the price you bought the asset from the sale price. Then, deduct your CGT allowance (£3,000 for the 2024/25 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 UK government’s 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 last week (i.e. after Reeves’s Budget when the new rates kicked in). 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 main CGT exemption is the ability to transfer assets to your spouse or civil partner without being subject to this tax. This effectively allows you to gift 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, where the sale proceeds are less than £6,000. McCann says: “Other exempt assets include UK Gilts, foreign currency held for your use, and private motor cars including vintage passenger cars’’.
How can you reduce your CGT bill?
You can reduce your CGT bill in several ways:
- Gifting assets to your spouse or civil partner: As mentioned, asset transfers between partners are exempt from CGT. If you jointly own an asset, such as a second property, you can combine your allowances. This can maximise your tax-free capital gains allowance, particularly if the partner with the lower tax rate sells the assets.
- Investing in ISAs and pensions: Another way to reduce CGT is investing in ISAs and pensions. Gains made within these tax-efficient wrappers are exempt from CGT, allowing you to shelter a significant portion of your investments from the tax on future sales.
- Use 'bed and ISA': Moving investments into an ISA protects future gains and dividends from tax. The process, known as ‘bed and ISA’, involves selling assets and immediately repurchasing them within an ISA. This allows you to crystallise gains up to your annual CGT allowance and then protect any future growth from CGT.
- Offsetting losses against gains: Myron Jobson, senior personal finance analyst at Interactive Investor, says: “Capital losses can be used to offset capital gains. If you have investments that have incurred losses, you can use these losses to offset gains realised on other investments, thereby reducing your overall tax liability.” Make sure to register any losses with HMRC within four years after the end of the tax year in which the sale occurred.
- Staggering asset sales: Another way to manage your CGT bill is by staggering the sale of profitable assets over several tax years. By selling portions of your investments in different tax years, you can make the most of several years' worth of CGT allowances. Jobson says: “Like the ISA allowance, CGT and dividend allowances work on a ‘use it or lose it basis’. As such, an option for those facing a tax bill is to delay capital gains by spreading them across two tax years. Theoretically, they could sell half their position on 5 April and sell the other half on 6 April – the start of the new tax year.”
- 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.
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