Capital Gains Tax (CGT) is a tax on the profit you make when you sell or otherwise dispose of an asset that has increased in value. It is not a tax on the total amount you receive — only on the gain, which is the difference between what you paid for the asset and what you received when you sold it.
CGT applies to individuals in the UK when they dispose of assets including shares and investments held outside of an ISA or pension, second homes and buy-to-let properties, business assets, and some personal possessions worth more than £6,000 (though many personal items are exempt). CGT does not apply to your main home (your primary residence) in most cases, to assets held within an ISA or pension, to UK government bonds (gilts), or to personal possessions worth less than £6,000.
The Annual Exempt Amount
Each tax year, every individual has an Annual Exempt Amount — the amount of capital gains they can make before CGT is due. Gains below this threshold are tax-free. The Annual Exempt Amount has been reduced significantly in recent years and currently stands at £3,000 per person per year. Check gov.uk for the current figure as this has changed frequently. Any unused allowance cannot be carried forward to the next tax year.
CGT rates
The rate of CGT you pay depends on both the type of asset and your income tax band. For most assets, basic rate taxpayers pay CGT at a lower rate and higher and additional rate taxpayers pay at a higher rate. Property gains (other than your main home) are taxed at higher rates than other assets. The specific rates change with each Budget — always check the current rates at gov.uk or with a tax adviser before making decisions based on CGT rates.
When do you need to pay CGT?
CGT is triggered by a disposal — which includes selling an asset, giving it away, swapping it for something else, or receiving compensation for it (such as an insurance payout). Simply owning an asset that has increased in value does not trigger CGT — only disposing of it does.
For most assets, you report and pay CGT through your self-assessment tax return. For residential property gains, HMRC requires you to report and pay the tax within 60 days of completion of the sale — a much shorter deadline than the annual tax return cycle. Late payment attracts interest and penalties.
How to calculate your capital gain
Your capital gain is broadly calculated as the proceeds from the sale (or the market value if you gave it away) minus the original cost of the asset, minus any allowable costs such as purchase costs, improvement costs, and selling costs such as estate agent fees or solicitor fees. You can also deduct any capital losses from the same or previous tax years from your gains before applying the Annual Exempt Amount.
Ways to reduce CGT legally
There are several legitimate ways to manage your CGT liability. Using your ISA allowance each year shelters investments from CGT permanently — gains inside an ISA are never subject to CGT. Using your Annual Exempt Amount each year by realising gains up to the threshold, rather than letting gains accumulate, can reduce the overall tax bill. Transferring assets to a spouse or civil partner (which is not itself a disposal for CGT purposes) can effectively double the available Annual Exempt Amount, since both partners have their own allowance. Claiming capital losses against gains — losses from the sale of assets at a loss can be offset against gains in the same or future tax years.
CGT and your main home
Private Residence Relief (PRR) means that when you sell a home that has been your main residence throughout your ownership, no CGT is payable. However, if you have ever let the property, used part of it for business purposes, or it was not your main residence for part of the ownership period, a portion of the gain may be taxable. The rules around PRR are complex — if in doubt, take advice from a qualified tax professional.