Capital gains tax in the UK

Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to pay.1

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – even a stake in your own company.

Like a maggot in your birthday cake, capital gains tax can really spoil the fun of making money.

Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job.

But CGT is a tax on investing success.

Take cover from CGT! Always try to use ISAs and pensions to shelter your investments from taxes. No tax is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you’ll lose money. That’s called a capital gains loss.

Unfortunately you don’t get money back from the government when you lose money.

However you can offset your capital losses against your gains to reduce your total taxable gain. You can also defuse unsheltered gains using your annual CGT allowance.

How UK capital gains tax works

Like income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.

You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:

• Your annual CGT allowance. (See below).

• Other reliefs or costs that can reduce or defer the gains.

• Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance was halved to £3,000 on 6 April 2024. It is now frozen at this level.

If your total taxable gains, minus any deductions, come to more than your annual tax-free allowance, then you pay CGT on everything over that allowance.

Capital gains tax rates

The capital gains tax regime was simplified in Labour’s October 2024 Budget.

Unfortunately the same Budget increased CGT rates, too.

The specific rate you’ll pay on your gains depends on your total taxable income.

Higher CGT rates from 30 October 2024:

• Basic-rate taxpayers now pay 18% on their capital gains.

• Higher-rate taxpayers pay 24%. 

These rates were increased in the Budget from the previous levels of 10% and 20% respectively.

CGT: We’re all in it together

Before the October 2024 Budget, second homes and buy-to-let properties2 were taxed at higher rates than other assets such as shares.

However CGT rates on non-property assets were increased in the Budget to the same level as those levied on property gains.

Meanwhile the rates levied on property were left unchanged.

Hence all chargeable assets are now taxed at those same 18% and 24% rates.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic-rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher-rate tax bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged on?

Historically-speaking, CGT has been a fairly avoidable tax for most everyday investors in the UK.

(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)

However the big decline in the annual CGT allowance – from over £12,000 a few years ago to just £3,000 from 6 April 2024 – has made it much harder to mitigate a potential capital gains tax bill.

Putting assets into tax shelters before they make any gains has thus become even more important.

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:

• Your main home (in 99% of cases)
• UK Government bonds (gilts)
• ISA and SIPP holdings
• Personal belongings worth less than £6,000 when you sell them
• Your car, unless used for business
• Other possessions with a limited lifespan
• Betting, lottery, or pools winnings (including spreadbets)
• Money which forms part of your income for Income Tax purposes
• Venture Capital Trusts
• Certain business holdings that qualify for entrepreneur’s relief

That still leaves many key assets liable for UK capital gains tax:

• Shares
• Corporate bonds
• Funds
• Antiques
• Buy-to-let property
• Land
• Gold (unless UK coins)

Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the sting of capital gains tax. 

Also remember that you have that annual capital gains tax allowance. So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It depends on your total capital gains for the year.

You might also be able to postpone paying your CGT bill by claiming deferral relief on certain government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.

Do your research. Don’t risk big losses just to cut your tax bill.

When to report capital gains tax

You need to report your taxable gains via your self-assessment tax return if:

• Your total taxable gain in the tax year exceeds your CGT allowance, and/or

• Your sales of taxable assets are in excess of £50,000 and you’re registered for self-assessment.

Under the current regime, if you sold £20,000 worth of shares in the year for a total gain of £2,000, there’s no need to report any of it. Your £2,000 in gains is below the annual CGT allowance. And your total sales were less than £50,000.3

In contrast, if you’d sold £52,000 of shares, say, and you are registered for self-assessment, then you would have to report the details to HMRC, regardless of the size of your total gain. That’s because you’ve sold taxable assets in the year in excess of the £50,000 threshold.

Capital gains are pooled together

All capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.

For example, if you made a gain (i.e. profit) of £15,000 selling shares and £8,000 from selling an antique wardrobe, then your total capital gain is £23,000.

Here losses might help you out.

For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.

See my article on mitigating capital gains tax for other strategies.

Who pays Capital Gains Tax in the UK?

Very few people pay capital gains tax.

A recent study of anonymised personal tax returns found that 97% of people never make any chargeable capital gains. Those who did were generally drawn from the ranks of the wealthy.

According to the Guardian:

Just 0.3% of people with income under £50,000 had taxable gains in an average year, compared with almost 40% of taxpayers with incomes over £5m receiving some gains.

Almost half of those who made a capital gain lived in the south-east. A quarter lived in London.

So paying capital gains tax puts you into a fairly exclusive club.

For investors, however, capital gains is an occupational hazard. If you are not able to do all of your investing inside ISAs and pensions, then you will probably pay CGT sooner or later.

Especially given how the annual CGT allowance has been slashed in recent years.

How do the UK’s CGT rates compare with other countries?

Even at the new higher rates, the UK regime is fairly competitive. Here are some example headline rates from our peers as of September 2024:

Source: Financial Times

It’s tricky comparing rates between different countries, as there can be lots of quirks, extra levies, and special allowances. Some countries may impose a wealth tax, or seek to generate revenues via higher transaction taxes.

The UK isn’t the only nation with a complicated tax code!

Certain jurisdictions do not charge CGT at all. These include the Bahamas, Belgium, Bermuda, the Cayman Islands, Gibraltar, Hong Kong, Jersey, Guernsey, the Isle of Man, the Netherlands, New Zealand, Qatar, Saudi Arabia, and Singapore.

Capital gains tax and me

I’ve paid CGT. I wasn’t even very wealthy at the time. Certainly my annual income was no great shakes.

I began investing 20-odd years ago with a biggish lump sum that I’d originally saved up as a house deposit.

I should have steadily put this cash into ISAs over the ten years or so it took me to save it. But I was silly and I didn’t. And so when I began investing, I had to build up my ISA tax shelter capacity from scratch. One year’s allowance at a time.

Eventually this landed me with a five-figure CGT bill when I sold the last of my unsheltered investments – and this despite years of diligently defusing my gains along the way.

You make your own luck

That investment had gone up more than ten-fold since I bought it outside of an ISA, a decade or so earlier.

Lucky me, you say?

Perhaps, but remember I wasn’t super-rich. I began as just a determined saver trying to keep up with the runaway London housing market. My initial deposit comprised of several tens of thousands of pounds of hard-won savings that I could have spent instead on holidays, clothes, or simply having more fun in my 20s and 30s, like most of my friends.

That is why I usually write that you ‘make’ a capital gain, or even that you ‘earn’ a gain.

Whereas The Guardian with its own biases says you ‘receive’ it. As if the capital gain just falls from the sky – like windfall!

That is true of an inherited gain, say – at least for the recipient

But capital gains nearly always only come after you’ve risked your own money.

So do what you can to keep hold of that reward in full by shielding your investments from capital gains tax.

1. Update: since I first wrote this article I bought my own home and paid Stamp Duty Land Tax at 5%. Turns out that’s just as annoying. [↩]
2. Held personally. Properties held via a limited company are on a different regime. [↩]
3. Remember, these are sales outside of an ISA or SIPP. Sales within shelters are not liable for CGT and not counted at all. [↩]