Capital Gains Tax: Definition, How It Works, and Current Rates

Have you ever sold something valuable - like property, shares, or artwork - and wondered if you owe tax on the profit? That’s where Capital Gains Tax (CGT) comes in. It’s a key part of managing your money smartly, especially if you invest or deal with high-value items. Knowing how it works can help you keep more of your earnings and avoid surprises. 

In this blog, we will walk you through everything you need to know about Capital Gains Tax - how it works, who pays it, current rates, and how to reduce what you owe. Let’s get started! 

Table of Contents 

1. What is Capital Gains Tax? 

2. When Capital Gains Tax is Applied? 

3. Who Pays Capital Gains Tax? 

4. Capital Gains Tax Rates for 2025/2026 

5. Capital Gains Tax Strategies 

6. Capital Gains Tax Exceptions 

7. How to Calculate Capital Gains Tax? 

8. Capital Gains Taxes Examples 

9. How to Apply Capital Gains Tax? 

10. How to Avoid Capital Gains Taxes? 

11. Conclusion 
     

What is Capital Gains Tax? 

Capital Gains Tax is the tax you pay when you make a profit from selling something valuable. This can include things like property, shares, or other investments. You are only taxed on the profit you make, not the total amount you sold it for. 

For example, if you bought a piece of land for £10,000 and later sold it for £15,000, your profit is £5,000. This £5,000 is called a capital gain, and you may have to pay tax on it. Some personal possessions, like your main home or car, are usually not taxed. However, it depends on the value and type of asset. 

When Capital Gains Tax is Applied? 

Capital Gains Tax is applied when you sell or give away something valuable and make a profit. This includes things like property, shares, or personal items worth more than a certain amount. You only pay tax on the profit, not the full selling price. 

Who Pays Capital Gains Tax?  

Here are the people who may need to pay Capital Gains Tax: 

1. People who sell property that is not their main home 

2. Anyone who makes a profit from selling shares or investments 

3. Business owners who sell business assets for a gain 

4. Individuals who give away valuable items and still make a gain 

5. People who inherit something and later sell it for a profit 

Capital Gains Tax Rates for 2025/2026 

Capital Gains Tax rates in the UK have been updated for the 2025/2026 tax year. These changes affect how much tax individuals and trustees pay when selling assets like property or shares. Here are the new rates: 

Capital Gains Tax Strategies 

Here are a few strategies to help lower your taxes and keep more of your profits:

Avoid Wash Sales 

This happens when you sell a losing investment and quickly buy it back to claim a tax loss. This is not allowed for tax purposes, and the loss won’t count. To avoid this, wait at least 30 days before buying the same or similar asset again. 

1. Wait 30 days before rebuying the same investment 

2. Don’t buy similar assets immediately after selling 

3. Plan sales around tax rules to claim valid losses 

Maximise Retirement Contributions 

Putting money into retirement accounts like a pension or ISA can reduce your taxable income. This means you might fall into a lower tax band and pay less Capital Gains Tax. It also helps you save for the future at the same time. 

1. Contribute to pensions or tax-free savings accounts 

2. Use yearly allowances to the full when possible 

3. Reduce your total income to lower your tax rate 

Time Your Retirement Wisely 

Selling assets after retirement could mean paying less Capital Gains Tax. That’s because your income may be lower, so you fall into a lower tax band. It’s a good idea to plan big sales when your income is smaller. 

1. Delay selling assets until you retire if possible 

2. Plan sales for low-income years for tax savings 

3. Spread gains over multiple years to stay below limits 

Monitor Holding Periods 

How long you keep an asset can affect the tax you pay. In some cases, holding it longer can bring tax benefits or allow for better planning. Keep track of purchase and sale dates to avoid surprises. 

1. Keep records of when you bought and sold assets 

2. Avoid short-term flipping of shares or property 

3. Plan sales to use annual tax-free allowances 

Choose the Right Cost Basis 

The cost basis is the original price you paid for an asset. Picking the right method for calculating it can reduce your tax bill. Some methods, like “specific identification”, give you more control over your gains. 

1. Track what you paid for each investment 

2. Use cost-basis methods that lower your gains 

3. Ask an advisor if you are unsure which method is best 

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Capital Gains Tax Exceptions 

Here are the common exceptions where you may pay less or no tax: 

Collectibles 

1. Some personal items like jewellery or antiques may be exempt 

2. Gains under a certain amount on collectables are not taxed 

3. If the item is worth less than £6,000, CGT might not apply 

4. Selling collectible items as a hobby may not trigger tax 

Owner-occupied Real Estate 

1. No CGT if the property is your main residence 

2. You must have lived in it as your only or main home 

3. Private Residence Relief may cover the full gain 

4. Letting part of it might still allow partial exemption 

Investment Real Estate 

1. You may get tax relief when selling business property 

2. Rollover relief allows delay of CGT if reinvesting 

3. Gift Hold-Over Relief applies when gifting to certain people 

4. Special rules apply if the property was used for business 

Investment Exceptions 

1. ISAs and pensions are usually free from CGT 

2. UK government bonds (gilts) are not subject to CGT 

3. Personal chattels sold below £6,000 are often exempt 

4. Shares transferred between spouses are tax-free 

How to Calculate Capital Gains Tax? 

Calculating Capital Gains Tax is easier when you break it down into simple steps. Here’s how you can do it: 

1. Work out your total profit (gain): This is the amount you made from selling or giving away assets during the tax year. Subtract what you paid for them from what you sold them for.  

2. Add up all Your Gains: Combine the profits from all relevant sales or disposals.  

3. Deduct Any Losses: If you sold other assets at a loss, you can subtract those losses from your total gains to reduce the taxable amount.  

4. Subtract Your Tax-free Allowance: For the 2025/26 tax year, the allowance is currently £3,000 (subject to confirmation by HMRC).  

5. Calculate the Tax: If your total gain (after losses and allowance) is more than £3,000, you’ll pay tax only on the amount above that limit. 

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Capital Gains Taxes Examples 

Here are simple examples of when Capital Gains Tax may apply: 

1. Selling shares for £5,000 after buying for £2,000 

2. Making a £10,000 profit from selling a second home 

3. Gaining £6,000 by selling a valuable painting 

4. Gifting jewellery that has increased in value 

How to Apply Capital Gains Tax? 

To apply Capital Gains Tax, you need to report your gains to His Majesty’s Revenue and Customs (HMRC). This is usually done through a Self-assessment tax return or using the 'real-time Capital Gains Tax service' if you're not filing a full return.  

You must provide details such as:  

1. What the asset was  

2. How much you paid for it (acquisition cost)  

3. How much you sold it for (disposal value)  

4. Any associated costs (like legal fees or estate agent fees)  

5. Any losses you’re claiming  

After you submit this information, HMRC will calculate how much Capital Gains Tax you owe (if any), and they’ll tell you how and when to pay it. 

How to Avoid Capital Gains Taxes? 

Here are simple ways to reduce or avoid paying Capital Gains Tax: 

1. Use your annual tax-free allowance before it runs out 

2. Put your investments in an ISA or pension 

3. Gift assets to your spouse to use their allowance 

4. Hold on to assets until your income is lower or in retirement 

Conclusion 

We hope this blog helped you understand the basics of Capital Gains Tax and how it works. Whether you're selling property, shares, or other valuable items, knowing when and how CGT applies can save you money. With the right planning and strategies, you can reduce your tax and keep more of your profit. Take time to check the rules, use your allowance, and make smart decisions for your future. 

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