What Is Capital Gains Tax?
Capital gains tax (CGT) is a tax on the profit - the gain - when you sell or dispose of an asset that has gone up in value. You don't pay tax on the full sale price, only on the profit above what you originally paid (plus any allowable costs like broker fees or improvement costs for property).
For example, you buy shares for £8,000 and sell them for £20,000. Your gain is £12,000. After deducting the £3,000 annual exempt amount, you'd pay CGT on £9,000.
CGT applies to most assets - shares, investment funds, second homes, buy-to-let properties, business assets, and personal possessions worth over £6,000. Your main home is generally exempt. Cash, ISA investments, Premium Bonds, and gilts are also exempt.
The CGT annual exempt amount has been cut dramatically in recent years - from £12,300 in 2022/23 to just £3,000 in 2024/25 and 2025/26. This means far more investors now have a CGT liability when they sell investments. Using your ISA allowance to shelter investments from CGT is more valuable than ever.
CGT Rates for 2025/26
| Asset Type | Basic Rate Taxpayer | Higher/Additional Rate |
|---|---|---|
| Shares, funds, most assets | 18% | 24% |
| Residential property (not main home) | 18% | 24% |
| Business Asset Disposal Relief (BADR) | 14% (rising to 18% from April 2026) | |
| Annual exempt amount | £3,000 per person | |
Your CGT rate depends on how much taxable income you have in the year. Gains are added on top of your income. If your income plus gains push you into the higher rate band, the portion above the higher rate threshold is taxed at 24%, while any portion that falls within the basic rate band is taxed at 18%.
What Is Exempt from CGT?
- Your main home - protected by Private Residence Relief (more on this below)
- ISA investments - all gains on investments held inside an ISA are completely exempt
- Cash and bank accounts - interest is taxed as income, but cash doesn't generate capital gains
- Pension funds - gains inside pension wrappers are exempt
- UK government bonds (gilts) - exempt from CGT
- Premium Bonds and NS&I savings - exempt
- Personal possessions under £6,000 - exempt (chattels relief)
- Cars - exempt, even if sold at a profit (for personal use vehicles)
- Transfers between spouses or civil partners - no CGT on transfers between partners while living together
- Gifts to charity - exempt
Legal Ways to Reduce Your CGT Bill
There are several well-established and legal ways to reduce the amount of CGT you pay:
1. Use your ISA allowance
Investments held inside a Stocks and Shares ISA are completely exempt from CGT. £20,000 per year can be sheltered. If you hold investments outside an ISA, consider "bed and ISA" - selling and immediately rebuying the same investment inside your ISA. You'll use your exempt amount to offset any gain on the sale, and future growth will be CGT-free.
2. Use your annual exempt amount every year
The £3,000 annual exempt amount can't be carried forward. If you have gains to realise, spread disposals across tax years to use the exemption each year rather than triggering a large gain in a single year.
3. Transfer assets to your spouse or civil partner
Transfers between spouses and civil partners living together are exempt from CGT. This means you can double the effective annual exempt amount (£6,000 combined) and use both partners' basic rate bands. If one partner is a basic rate taxpayer and the other is higher rate, transferring assets to the basic rate partner before sale reduces the CGT rate from 24% to 18%.
4. Offset losses against gains
Capital losses - when you sell an asset for less than you paid - can be set against capital gains in the same tax year. If you have investments sitting at a loss, crystallising that loss by selling can offset gains elsewhere. You can also carry losses forward to future tax years. You must report losses to HMRC to use them.
5. Salary sacrifice and pension contributions
Making pension contributions can reduce your adjusted net income, which affects whether your gains are taxed at the basic or higher rate. If a pension contribution pushes you from higher rate to basic rate, the portion of gains that now falls in the basic rate band is taxed at 18% rather than 24%.
If you sell shares to crystallise a loss (or use your annual exempt amount) and immediately rebuy the same shares, HMRC's "bed and breakfast" rule means the disposal is matched against the repurchase and the gain or loss is effectively cancelled. To genuinely realise a gain or loss, you must wait 30 days before rebuying the same shares - or use the "bed and ISA" or "bed and SIPP" route, which are not subject to the 30-day rule.
CGT on Property
Your main home is generally exempt from CGT under Private Residence Relief (PRR). To qualify for full relief, the property must have been your main residence for the entire period of ownership. A final period exemption of 9 months also applies - so even if you've moved out, gains accrued in the final 9 months before sale are exempt.
CGT does apply to:
- Second homes and holiday properties
- Buy-to-let properties
- Property inherited and then sold (gain measured from the probate value)
- The portion of your home used exclusively for business
For residential property, CGT must be reported and paid within 60 days of completion. This is different from other assets where you report via Self Assessment after the tax year ends.
For gains on assets other than residential property, you report CGT via your Self Assessment tax return after the end of the tax year (deadline 31 January following the tax year). For UK residential property, you must report and pay within 60 days of completion using HMRC's online CGT on UK Property service - even if you also complete a Self Assessment return. Missing the 60-day deadline triggers automatic penalties.