Ultimate Guide to Capital Gains Tax

If you’re planning to sell or gift an asset, you may be wondering, “What are capital gains?”, “What is capital gains tax?” and “What is the capital gains tax allowance?”. You may be curious about capital gains tax rates and capital gains tax on property or other assets.

Understanding how capital gains tax is applied can make a difference when planning to sell valuable assets. Many people are unsure how their gains are calculated or what rates actually apply when they dispose of investments, property, or personal possessions.

A clear example can help clarify how these taxes work in practical situations. In this article, you will get free advice on capital gains tax (CGT). We provide a definition of CGT and see a step-by-step illustration of how it’s worked out in a typical scenario.

What Is Capital Gains Tax?

Capital gains tax (CGT) is a tax applied to the profit made when someone sells or disposes of an asset that’s increased in value. It’s the gain itself, not the amount received from the sale, that is taxed.

But what is capital gains tax in the UK? CGT most commonly applies to assets such as shares, investment funds, second properties, and personal possessions worth over £6,000 (not including cars). The standard definition of a capital gain is the difference between the sale price and the original purchase price.

CGT explained simply means understanding that only specific gains are taxed, and there are allowances and exemptions available. For example, some assets and gains may be entirely exempt from CGT.

So, when do you pay capital gains tax? Typically, an individual will need to pay CGT if:

• They sell shares or investments at a profit
• They dispose of property that is not their main home
• They give away valuable possessions, and the recipient later sells them at a gain

CGT rates and allowances can change over time and may differ depending on how much other income a person has in the tax year. Both the process and the calculation of CGT in the UK are regulated by HM Revenue & Customs (HMRC).

Here’s a basic overview of how capital gains tax works:

What Is a Disposal?

A disposal, for capital gains tax (CGT) purposes, occurs when a person sells, gives away, exchanges, or otherwise ceases to own an asset. The term covers any situation where ownership or rights to the asset change hands.

Disposals include selling an asset for cash, but also cover gifts to family, friends, or charities. Even if the asset is given away without payment, HMRC still treats this as a disposal.

The following situations are considered disposals:

• Selling all or part of an asset
• Giving away an asset
• Swapping or exchanging an asset
• Receiving compensation, such as insurance payouts for lost or destroyed items

A part-disposal takes place when only a portion or share of an asset is transferred. For example, selling a section of a plot of land counts as a part-disposal.

What Do You Pay Capital Gains Tax On?

Who pays capital gains tax? CGT is charged when an individual sells or “disposes of” qualifying assets that have increased in value. The tax is calculated on the profit made, not the total amount received.

Common assets subject to CGT include:

• Property (not your main home)
• Shares and investments (outside of ISAs or pensions)
• Business assets
• Valuable items, such as antiques or jewellery

Property capital gains tax will often apply when selling a property that isn’t your main home, such as a second property or buy-to-let. The main home is usually exempt, but conditions apply and restrictions may affect the exemption.

When someone sells shares or other investments, CGT is due on the gain if it exceeds the annual allowance. Investments held within an ISA or pension are exempt from CGT.

CGT also applies when transferring assets to someone else, exchanging them, or receiving compensation (for example, insurance payouts for lost or destroyed items).

Inheritance and gifts can also trigger a capital gain if the asset is later sold. However, assets left to a spouse or civil partner are usually exempt from CGT at the time of transfer.

If the asset is jointly owned, each owner must calculate their own gain and pay CGT accordingly.

Tax Allowances

The capital gains tax (CGT) allowance, also known as the annual exempt amount, is the threshold up to which an individual can make capital gains without being liable for tax in a given tax year.

For the 2024–25 and 2025–26 tax years, the allowance is set at £3,000 per individual. For trusts, the allowance is lower at £1,500. Any gains above these figures are subject to CGT.

Only gains that exceed the annual exemption are taxed. Losses can be used to offset gains above the allowance, further reducing the CGT liability.

Different CGT rates apply depending on the total taxable profits and an individual’s income tax band:

• 18% for basic rate taxpayers (main assets)
• 24% for higher and additional rate taxpayers (main assets from April 2025)
• Other rates may apply to specific types of gains, such as carried interest.

Certain reliefs, such as private residence relief or business asset disposal relief, may reduce the amount of gain that is taxable, allowing further potential savings on CGT.

Tax on Gifts

Capital gains tax (CGT) can apply when a person gifts an asset, such as property or shares, to someone else. However, there are important exceptions and reliefs that may reduce or eliminate the tax.

Gifts to a spouse or civil partner are generally exempt from CGT. The asset is simply transferred at its original value, and no gain or loss arises at the time of transfer.

When gifting to anyone else, including children or friends, CGT may be due if the asset has increased in value since it was acquired. The gain is calculated using the asset’s market value at the time of the gift, not the price paid.

The key exemptions to tax on gifts are:

• Gifts to registered charities
• Transfers between spouses or civil partners

For those considering how to avoid capital gains tax on property in the UK, gifting isn’t always an effective solution. When gifting property to a non-exempt person, the disposal is treated as a sale at market value for CGT purposes.

This table shows common gift scenarios and CGT treatment:

To minimise exposure, some transfer assets gradually using annual tax-free allowances, or use main residence exemptions where available.

How to Calculate How Much Tax You Need to Pay

In order to know how much capital gains tax you need to pay, you’ll first need to determine if you’ve made a capital gain. Capital gains tax (CGT) is only paid when the profit from selling an asset exceeds the annual tax-free allowance.

Next, the gain is calculated by subtracting the asset's original purchase price and any allowable costs (such as legal fees or improvement costs) from the sale price. This is the taxable gain.

You should then check if your total taxable gains for the tax year are above the annual CGT allowance. For the 2024/25 tax year, only gains above the allowance are taxed.

The CGT rate depends on both the type of asset sold and the individual’s income tax band. The rates are typically:

To identify the total tax due, the individual multiplies any taxable gain above the allowance by the applicable rate based on their income tax bracket and asset type.

1. Work out the total gain (sale price minus purchase price and allowable costs).
2. Deduct the CGT annual allowance.
3. Identify the correct rate based on income and the asset.
4. Multiply the gain over the allowance by the correct percentage to find out how much CGT they owe.

How Can You Report and Pay CGT?

Reporting and paying capital gains tax (CGT) in the UK follows clear steps. For UK property disposals after 6 April 2020, individuals must report the gain within 60 days of completing the sale if there is a tax liability.

All capital gains, including those not related to property, are usually reported on the annual self-assessment tax return.

If someone needs to report a gain outside of their usual tax return, such as a property gain, they can use the Government Gateway online service.

• Calculate the gain made from the disposal.
• Deduct any allowable costs and reliefs.
• Report the gain using the appropriate platform (e.g. HMRC's website or self-assessment).

CGT on property (residential) in the UK must also be made within 60 days of the sale.

For other assets, payment is due by 31 January following the end of the tax year in which the gain was made.

Below is a summary table of reporting and paying CGT:

Late reporting or payment can result in penalties or interest.

Using HMRC’s digital services ensures a quicker process and an immediate acknowledgement of submission.

Key Takeaways

Capital gains tax (CGT) is applied to the profit made from selling or disposing of assets that have increased in value. 

It’s only due on the gain, not the total sale amount, and there are tax-free allowances that help reduce liability. 

The rates and allowances can change annually, and taxpayers must report their gains, typically through the self-assessment system, to ensure compliance. 

Failure to report or pay CGT on time can result in penalties, so understanding the rules and keeping track of any applicable CGT relief and exemptions is essential for minimising tax liability.