What is Capital Gains Tax?

Capital Gains Tax Explained

Capital Gains Tax (CGT) is a tax on the profit (or gain) you make when you sell, give away, or otherwise dispose of an asset that has increased in value. It is not charged on the total sale price but on the gain — the difference between what you paid for the asset and what you received when disposing of it.

CGT is governed primarily by the Taxation of Chargeable Gains Act 1992 and administered by HMRC. It applies to individuals, trustees, and personal representatives of deceased persons. Companies pay corporation tax on their chargeable gains rather than CGT.

What Assets Are Subject to CGT?

CGT can apply to most assets, including:

• Shares and investments (outside of ISAs and pensions)
• Property that is not your main home
• Business assets including goodwill and equipment
• Personal possessions worth more than £6,000 (known as chattels)
• Cryptocurrency
• Foreign currency (other than personal spending money)

Exempt Assets

Certain assets are exempt from CGT:

• Your main home (principal private residence relief)
• Assets held in ISAs or pensions
• UK government gilts and qualifying corporate bonds
• Personal possessions worth £6,000 or less
• Cars (including classic cars)
• Lottery and betting winnings
• Gifts to charity
• Compensation for personal injury

CGT Rates (2024/25)

The rate of CGT depends on the type of asset and your total taxable income:

Standard Assets (Shares, Business Assets)

Residential Property (Not Main Home)

To determine which rate applies, add your capital gain to your taxable income. If the combined total falls within the basic rate band (up to £50,270), the basic rate of CGT applies. If it pushes you into the higher rate band, the excess is taxed at the higher CGT rate.

Annual Exempt Amount

Each individual has an Annual Exempt Amount (AEA) — a tax-free allowance for capital gains. For 2024/25, this is £3,000 per person.

Gains below this threshold are not taxable. The AEA cannot be carried forward to future years — if you do not use it, you lose it.

Trustees have an AEA of £1,500 (half the individual amount).

How to Calculate a Capital Gain

The basic calculation is:

1. Disposal proceeds — the amount received (or market value for gifts)
2. Minus allowable costs:
   • Original purchase price
   • Costs of buying and selling (solicitor fees, estate agent fees, stamp duty)
   • Cost of improvements that enhanced the asset’s value
3. Equals the chargeable gain (or allowable loss)

Example

Reliefs and Exemptions

Business Asset Disposal Relief (BADR)

Formerly known as Entrepreneurs’ Relief, BADR provides a reduced CGT rate of 10% on qualifying business disposals up to a lifetime limit of £1 million. To qualify, you must:

• Be disposing of all or part of a business you have owned for at least 2 years
• Or disposing of shares in a trading company where you hold at least 5% of shares and voting rights and are an officer or employee

Investors’ Relief

Similar to BADR but for external investors in unlisted trading companies. The CGT rate is 10% with a lifetime limit of £10 million. The shares must have been held for at least 3 years and acquired by subscription.

Rollover Relief

When you sell a business asset and reinvest the proceeds in a new qualifying business asset, you can defer the gain until the replacement asset is sold. Qualifying assets include land, buildings, and fixed plant and machinery.

The replacement must be purchased between 1 year before and 3 years after the disposal.

Hold-Over Relief (Gift Relief)

When you give away a business asset or shares in an unquoted trading company, you and the recipient can jointly elect to defer the gain. The recipient takes on the asset at your base cost, so the gain is deferred until they eventually sell.

Principal Private Residence Relief

Your main home is usually fully exempt from CGT. However, if the property was not your main residence for the entire period of ownership, a proportion of the gain may be taxable. The final 9 months of ownership always qualify for relief, even if you have moved out.

Losses

If you make a capital loss, you can:

• Set it against gains in the same tax year
• Carry forward unused losses to future tax years indefinitely
• Losses must be reported to HMRC in the tax year they arise (within 4 years)

Losses are deducted from gains before the Annual Exempt Amount is applied.

Reporting and Payment

Self-Assessment

Capital gains are reported through the self-assessment tax return. The deadline for filing is 31 January following the end of the tax year.

UK Property Disposals

For UK residential property disposals, you must report and pay CGT within 60 days of completion using the CGT on UK property account. This is in addition to reporting the gain on your self-assessment return.

Non-UK Residents

Non-UK residents are subject to CGT on:

• UK residential property
• UK commercial property (from April 2019)
• Shares deriving 75%+ of their value from UK land

CGT and Marriage or Civil Partnership

Transfers between spouses or civil partners are treated as taking place at no gain and no loss, provided they are living together. This means no CGT is charged on transfers between partners, making it possible to use both partners’ Annual Exempt Amounts and basic rate bands.

Interaction with Other Taxes

CGT applies to individuals on asset disposals. Companies pay corporation tax on their chargeable gains instead. The gain may also interact with your income tax position since the CGT rate depends on your income tax band. When acquiring assets, you may have paid Stamp Duty , which forms part of the allowable cost base.

Accurate record keeping of asset purchases, improvements, and disposals is essential for calculating CGT correctly, especially for assets held over many years.