What is Capital Gains Tax (CGT)?
CGT is the tax you pay on profits from selling assets that have increased in value - like property, shares, or your business.
Current Rate (2025/26)
10%/20% for most assets; 18%/24% for residential property (2025/26)
Example
Buy shares for £10k, sell for £50k. CGT on £40k gain = £8k (at 20% higher rate).
Key Dates
Report via Self Assessment; residential property must be reported within 60 days
How Capital Gains Tax (CGT) Works in Practice
Capital Gains Tax is charged on the profit you make when you dispose of an asset that has increased in value. The key word is 'dispose' -- this covers selling, gifting, swapping, or receiving compensation for an asset. You are not taxed on the entire sale price, only on the gain, which is the difference between what you paid for the asset (or its market value when you acquired it) and what you received when you disposed of it.
For the 2025/26 tax year, the rates depend on the type of asset and your Income Tax band. For most assets (shares, business assets, personal possessions over £6,000), the rates are 10% for basic-rate taxpayers and 20% for higher and additional-rate taxpayers. Residential property that is not your main home attracts higher rates of 18% and 24% respectively. Your main home is generally exempt under Private Residence Relief.
You get an Annual Exempt Amount of £3,000 for 2025/26. This means the first £3,000 of gains in any tax year is completely free of CGT. This allowance cannot be carried forward to future years, so if you do not use it, you lose it. Married couples and civil partners each get their own allowance, so transfers between spouses can be used to maximise the exemption.
Several reliefs can reduce or defer CGT. Business Asset Disposal Relief (formerly Entrepreneurs' Relief) charges only 10% on qualifying business disposals up to a £1 million lifetime limit. Investors' Relief offers a similar 10% rate on qualifying shares up to £10 million. Holdover Relief allows you to defer gains when gifting business assets. EIS and SEIS deferral relief can also shelter gains reinvested into qualifying companies.
CGT is reported and paid through Self Assessment for most assets. However, UK residential property disposals must be reported to HMRC within 60 days of completion, and any tax due must be paid at the same time using the Capital Gains Tax on UK Property service.
Step by Step
When you sell or dispose of an asset, you calculate the gain by taking the disposal proceeds and subtracting the original acquisition cost, any allowable purchase costs (such as stamp duty or legal fees), and any enhancement expenditure (improvements that added value to the asset). If the disposal is to a connected person or is a gift, you use market value instead of actual proceeds.
You then deduct your Annual Exempt Amount of £3,000. Any applicable reliefs (such as Business Asset Disposal Relief, Private Residence Relief, or EIS deferral) are applied next. The remaining taxable gain is added on top of your income for the year to determine whether it falls within the basic-rate band or spills into the higher-rate band. The CGT rate applied depends on which band the gain falls into.
For example, if your taxable income is £40,000 and you have a £20,000 gain after the annual exemption, the first £10,270 of gain falls within the basic-rate band (up to £50,270) and is taxed at 10%. The remaining £9,730 falls into the higher-rate band and is taxed at 20%.
Practical Tips
- Use your £3,000 Annual Exempt Amount each year -- consider selling assets in stages across tax years to maximise the exemption
- Transfer assets to your spouse before selling to utilise both annual exempt amounts, potentially sheltering £6,000 of gains
- Keep detailed records of all acquisition costs, improvement expenditure, and disposal costs -- these all reduce your taxable gain
- If you are selling a business, check whether you qualify for Business Asset Disposal Relief well in advance -- the qualifying conditions must be met for at least two years
Common Mistakes to Avoid
- Forgetting to report residential property disposals within 60 days -- HMRC charges penalties and interest on late reports
- Not using your £3,000 Annual Exempt Amount before the tax year ends -- it cannot be carried forward
- Ignoring allowable costs like stamp duty, solicitor fees, and improvement costs that reduce your taxable gain
- Assuming all property sales are exempt -- only your principal private residence qualifies for full Private Residence Relief
Frequently Asked Questions
Do I pay CGT on my main home?
No, your main home (principal private residence) is usually fully exempt from CGT under Private Residence Relief. However, if you let part of it, used it for business, or had periods of absence, a proportion may be taxable.
Can I offset capital losses against gains?
Yes, capital losses from the same tax year are automatically offset against gains. Losses from previous years can also be carried forward indefinitely and used against future gains, but only to the extent they reduce gains below the Annual Exempt Amount.
When do I need to pay CGT?
For UK residential property, you must report and pay within 60 days of completion. For all other assets, CGT is reported via your Self Assessment return and paid by 31 January following the end of the tax year.
Is transferring assets to my spouse a CGT event?
Transfers between spouses or civil partners who are living together are treated as taking place at 'no gain no loss'. This means no CGT is due at the time of transfer, but your spouse inherits your original acquisition cost for future disposals.
What is the CGT rate if I qualify for Business Asset Disposal Relief?
BADR reduces the CGT rate to 10% on qualifying gains up to a lifetime limit of £1 million. You must have been a trading company officer or employee with at least 5% of shares and voting rights for at least two years before disposal.
Source: HMRC Capital Gains Tax Manual (CG10000+): https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual
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