Capital Gains Tax Guide
Get to grips with how capital gains tax is calculated
The main rates of capital gains tax were increased in the October 2024 Budget. For disposals made before 30th October 2024 the rates are as follows:
* 10% Basic-rate taxpayers (income under £50,270)
* 20% Higher-rate taxpayers
For disposals made on or after 30th October 2024 the rates are now:
* 18% Basic-rate taxpayers
* 24% Higher-rate taxpayers
The rates for residential property were not changed in the October 2024 Budget and remain:
* 18% Basic-rate taxpayers
* 24% Higher-rate taxpayers (28% in 2023/24)
The main rates typically apply to:
* Those disposing of commercial property (except where a business owner disposes of trading premises and Business Asset Disposal Relief is available)
* Stock market investors
* Property investors who use a company to invest in property, when the company itself is sold or wound up
* Owners of trading companies who do not qualify for Business Asset Disposal Relief
In summary, both the main rates and the rates applying to residential property are now the same for disposals made on or after 30th October 2024.
There are other capital gains tax rates. For example, if you're entitled to Business Asset Disposal Relief (previously called Entrepreneurs Relief) the tax rate was 10% last year (2024/25) but is 14% from 6th April 2025 and will be increased again to 18% from 6th April 2026.
This relief is generally only available when you sell or wind up a trading business.
Basic-Rate Taxpayers
If you are a basic-rate taxpayer you can pay 18% CGT on some or all of your capital gains.
(The rate was just 10% for most assets other than residential property disposed of before 30th October 2024.)
You can only benefit from the lower CGT rate if your taxable income (for example your salary) does not already use up your basic-rate band.
In other words:
* If your taxable income this year exceeds £50,270 (the higher-rate threshold) you will pay CGT at 24% on all of your gains.
* If your taxable income is less than £50,270 you will pay CGT at 18% on some or all of your gains.
For example, if your only income this year is a salary of £40,000 you will have £10,270 of your basic-rate band left over for capital gains tax purposes: £50,270 - £40,000 = £10,270.
This means you can have £10,270 of capital gains taxed at 18%.
In years when you sell assets it may be possible to reduce your taxable income to free up your basic-rate band and pay CGT at the lower rate.
The basic-rate band is £37,700 which means you can have up to £37,700 of capital gains taxed at the lower rate.
This means the maximum CGT saving that can be achieved this year by reducing your income and freeing up your basic-rate band is as follows:
£37,700 x 6% = £2,262 (18% CGT instead of 24%)
The Annual Capital Gains Tax Exemption
The annual CGT exemption is now just £3,000. This means capital gains of up to £3,000 can be realised tax free during the current 2025/26 tax year.
The annual CGT exemption will probably remain at £3,000 for now, which means it will become less valuable every year. It used to be £12,300 and used to increase each year with inflation and was a valuable tax-saving concession. It would have been around £16,000 by now had it increased each year with inflation.
Example - Basic CGT Calculation
Caitlin sells a buy-to-let property in December 2025 and realises a capital gain of £45,000 (after deducting all her buying and selling costs).
Her taxable income for 2025/26 is £40,000 which means she still has £10,270 of her basic-rate band remaining (£50,270 higher-rate threshold less £40,000).
Caitlin deducts her annual exemption of £3,000 from the £45,000 gain, leaving a taxable gain of £42,000. The first £10,270 is taxed at 18% and the remainder at 24%, giving her a capital gains tax bill of:
£10,270 x 18% £1,849
£31,730 x 24% £7,615
Total £9,464
Further Annual Exemption Benefits
Couples enjoy one capital gains tax exemption each so they can have £6,000 of tax-free capital gains per year.
Minor children also have their own annual exemption.
The estate of a deceased person has its own annual exemption in the tax year of the death and the following two tax years.
Trusts also have their own annual exemption equal to half of the annual exemption available to individuals (i.e. £1,500). However, this amount must be sub-divided amongst all of the trusts set up by the same settlor.
Bed and Breakfasting
The old practice known as bed and breakfasting is no longer possible in its simplest form. This involved selling assets like stock market shares to crystallise capital gains and avoid wasting the annual CGT exemption. The same shares could then be bought back the next day.
The tax rules no longer allow this. However, there are a number of ways you can avoid wasting your annual CGT exemption:
* Wait 31 days before buying the shares back. This strategy will not appeal to those who wish to remain fully invested.
* Bed and Spouse. This strategy can be used by all couples (married or not). One person sells the shares and the other makes an equivalent purchase. (For married couples the repurchase must be made on the open market - a direct sale from one spouse to the other will not have the desired effect.)
* Bed and ISA - sell some shares to make use of your annual CGT exemption and buy them back in your ISA.
Splitting Capital Gains with Your Spouse/Partner
Couples can can save income tax by splitting income with your spouse or partner.
Owning assets together can also help you save capital gains tax. This is because, when you sell the asset, you can benefit from two CGT exemptions and possibly two basic-rate bands (where the capital gains tax rate is now 6% lower: 18% instead of 24%).
The maximum additional saving from owning an asset such as a rental property with your spouse or partner is now £2,982:
£37,700 basic-rate band x 6% £2,262
£3,000 CGT exemption x 24% £720
Total £2,982
In many cases both spouses will already be earning enough income to be higher-rate taxpayers. In these circumstances the maximum additional capital gains tax saving that can be achieved by owning assets together will be just £720.
Transfers between Spouses
Capital gains tax is payable even if you simply give an asset to a family member, for example your children. You're taxed as if you sold the asset for its full market value.
However, there is no capital gains tax payable if you transfer an asset to your spouse. Instead the gain is deferred until the receiving spouse disposes of the asset. They will then be treated as having bought the asset at the same original cost as you.
For example, let's say you bought a rental property for £100,000 and it's now worth £250,000. If you give the property to one of your children you will be taxed on a gain of £150,000 (ignoring various expenses you can deduct etc).
But if you transfer the property to your spouse there will be no capital gains tax payable by you. Instead, when your spouse eventually sells the property, they will be taxed as if they purchased it for £100,000.
Divorcing Couples
When couples divorce the spouse exemption used to finish at the end of the tax year in which they separated. From 6th April 2023 separating spouses are being given three tax years after the tax year they stop living together to make exempt transfers.
The exemption will also apply, without time limit, to assets that are transferred to each other as part of a formal divorce agreement.
Where an individual retains an interest in the former matrimonial home, they will be able to claim private residence relief when it is eventually sold. When an individual transfers their interest in the former matrimonial home to their ex-spouse, but are entitled to a share of the proceeds when it's sold, they will be able to claim private residence relief, despite not living in the property at the time of sale.
Spreading Asset Sales
Those who plan to sell more than one asset (for example more than one property) may wish to consider spreading their sales over more than one tax year. This allows you to enjoy more than one year's CGT exemption and possibly more than one year's basic-rate band.
However, with the huge reduction in the CGT exemption, this strategy will save much less capital gains tax than in the past. Now that the annual exemption is just £3,000 spreading asset sales over more than one tax year will save a couple who are both higher-rate taxpayers at most £1,440 per year (£3,000 x 2 x 24%).
Where it is possible for a couple to also benefit from another year's worth of basic-rate band, spreading the sales over more than one tax year may save them up to an additional £5,964 per year in capital gains tax.
Main Residence Relief
Principal private residence (PPR) relief protects your main residence from capital gains tax. It covers the period during which the property was your main residence plus the last 9 months before selling.
Any property which has been your main residence and has been rented out at some point used to qualify for private lettings relief of up to £40,000 per person.
However, private letting relief is now restricted to periods where the owner is in shared occupancy with a tenant. In other words, it is now restricted to periods when you are renting out part of your home while it is still your main residence.
Capital Losses
Capital losses are automatically set off against capital gains arising in the same tax year.
Any surplus losses are carried forward for set off against future gains. These carried forward losses are only used up to the extent your future gains exceed the annual exemption. This means your annual exemption for the year will not be wasted.
The capital loss rules have a couple of important practical implications:
* Losses must be realised by 5th April 2026 in order to be set off against capital gains you have realised in 2025/26.
* If the losses you realise during the current tax year take your capital gains below £3,000, some of your annual exemption will be wasted.
The timing of the disposal of assets standing at a loss should therefore be considered carefully.
Business Asset Disposal Relief
Business Asset Disposal Relief (previously called Entrepreneurs Relief) allows every individual to have capital gains of up to £1 million over their lifetime taxed at a more favourable rate.
The rate for the current 2025/26 tax year is 14% (10% last year).
The rate will increase from 14% to 18% from 6th April 2026.
Who Qualifies?
Business Asset Disposal Relief is supposed to benefit owners of trading businesses. These are, for want of a better word, “regular” businesses – the likes of shopkeepers, dressmakers, consulting engineers, graphic designers …and thousands more like them.
A business loses its trading status when it owns significant investments, including rental properties. If you are a property investor, the taxman treats you as a business owner… but not a trading business owner.
One type of property that can qualify for Business Asset Disposal Relief is the trading premises of your own business, for example a retail unit owned by a sole trader.
Business Asset Disposal Relief can also be claimed when your company or partnership uses a property that you own personally, however there are a large number of restrictions.
Company owners are entitled to Business Asset Disposal Relief when they sell their shares or wind up the company. The main qualifying criteria are the following:
* The company must be your 'personal company';. Generally speaking, this means you must own at least 5% (the definition is actually a bit more complicated than this)
* You must be an officer or employee of the company
* The company must be a 'trading' company
Each of these rules must be satisfied for at least two years before the company is sold or wound up.
Where the company has ceased trading each of the rules must be satisfied for at least two years before it ceases trading. The disposal of the company must then take place within three years after trading has stopped.
Company Liquidations
The taxman was concerned that some company owners were abusing the special capital gains tax rate by paying themselves capital gains instead of dividends. They would do this by liquidating their company, extracting all the cash as a capital distribution and then continuing their business through a new company.
Rules that have applied since 6th April 2016 mean that, in some cases, profits distributed in a winding up will be treated as dividends and taxed at a rate as high as 39.35%.
This will typically happen if, within two years of the distribution, the company owner carries on a similar trade or activity to the company being wound up and it can be shown that one of the main purposes of the winding up was to avoid income tax.
For detailed information on Business Asset Disposal Relief see the Taxcafe guide Salary versus Dividends.
Investors Relief
This relief currently provides a 14% capital gains tax rate for certain investors in unlisted trading companies (previously 10%).
The tax rate will increase from 14% to 18% from 6th April 2026.
The Government has also reduced the lifetime limit from £10 million of capital gains to £1 million for disposals made on or after 30th October 2024.
Reporting Capital Gains
The reduction in the annual CGT exemption to just £3,000 means more and more people will be paying capital gains tax, especially stock market investors who hold shares outside the protection of an ISA or SIPP and people who invest in cryptocurrency.
You generally have to report your gains to HMRC if:
* Your gains are more than the annual exempt amount and you have capital gains tax to pay, or
* The total value of your disposal proceeds exceeds £50,000 and you're registered for self assessment, even if your gains for the year are less than the annual exempt amount and therefore tax free.
You report your sales by completing the Capital Gains Tax summary pages of your tax return.
For those who don't complete a tax return, HMRC has also introduced a real time capital gains tax service that can be used to pay any outstanding capital gains tax. However, you cannot use this service to report gains from UK residential property.
It is also important to report capital disposals that give rise to an overall capital loss for the tax year, so that you can carry the loss forward to future years.
CGT Payments – Residential Property
If you sell a property and the gain is totally covered by the principal private residence exemption (for example the sale of your own main home) it does not have to be reported to HMRC.
For CGT arising on disposals of UK residential property, a payment on account is due 60 days after the date of completion. The payment should usually be made together with a CGT on UK property return.
For taxpayers already within self-assessment the capital gain on disposal of a UK residential property will generally have to be reported again in their self-assessment tax return.
Company Capital Gains
Companies pay corporation tax on their capital gains. (See Chapter 11 for more information about corporation tax.)
One difference between companies and individuals is that companies may be entitled to some indexation relief on their capital gains.
Indexation relief protects the owner of an asset from paying tax on any increase in its value which is simply due to inflation.
Unfortunately companies can no longer enjoy full indexation relief on their capital gains – they can only enjoy relief for the period up to 31st December 2017.
Take the example of a company that sells a property in March 2026 that it purchased in June 2005. Indexation relief will be available for the period June 2005 to December 2017. Indexation relief is not available for the period December 2017 to March 2026.
For further information about indexation relief see the Taxcafe guide Using a Property Company to Save Tax.
This guide tells you everything you need to know about using a company to invest in property.
More Information about Capital Gains Tax
For most individuals it is the sale of property – rental properties and second homes – that gives rise to significant capital gains tax bills.
Taxcafe's guide How to Save Property Tax contains a huge amount of detailed information about property capital gains tax, including a plain English guide to how the tax is calculated, how your gains must be reported to HMRC and lots of tried and tested tax planning ideas.
Our Salary versus Dividends guide contains a significant amount of additional information on Business Asset Disposal Relief (which lets you pay capital gains tax at a reduced rate when your sell your company or wind it up).
The information contained in this article on how to calculate capital gains tax is covered in detail in our popular tax guide:How to Save Property Tax by Carl Bayley
This bestselling tax book is essential reading when calculating how much capital gains tax you should be paying.
