Everyone has a Capital Gains Tax allowance, the annual exempt amount, which lets you make a set level of gains each year tax-free. For 2025/26 it is just £3,000. Here is how it works and what you pay above it.
Capital Gains Tax is the tax you pay on the profit when you sell or dispose of an asset that has gone up in value. The Capital Gains Tax allowance, formally called the annual exempt amount, is the buffer that lets you make a certain level of gains each year before any tax is due. For most of the past decade that buffer was generous. It is now one of the smaller allowances in the tax system, having been cut twice in successive years, and that change has pulled far more ordinary investors and second-property owners into the CGT net.
If you have only ever thought about CGT in the context of selling a business or a buy-to-let, the shrinking allowance is a reason to pay closer attention. With the exempt amount now at £3,000, a single sale of shares, a fund, a holiday home, or even a high-value personal possession can produce a taxable gain where it would have been comfortably covered just three years ago.
Capital Gains Tax applies to the gain, not the total amount you receive. If you buy shares for £8,000 and sell them for £12,000, the gain is £4,000, and it is only that £4,000 that matters for tax. The annual exempt amount is then deducted from your total net gains for the year.
The word net is important. You add up all your gains in the tax year, subtract all your allowable losses, and only then apply the £3,000 exemption to what remains. If your net gains for the year are £3,000 or less, you pay no Capital Gains Tax at all.
CGT applies to a wide range of assets: shares and funds held outside an ISA or pension, second homes and buy-to-let property, business assets, valuable personal possessions worth more than £6,000 (such as art, antiques or jewellery), and most cryptoassets. It does not apply to your main home (covered by Private Residence Relief), your car, ISA and pension investments, or UK government gilts.
The annual exempt amount has been on a steep downward path. Understanding the recent history explains why CGT now affects so many more people.
| Tax year | Annual exempt amount (individuals) |
|---|---|
| 2022/23 | £12,300 |
| 2023/24 | £6,000 |
| 2024/25 | £3,000 |
| 2025/26 | £3,000 |
The rates also changed mid-way through 2024/25. For disposals made on or after 30 October 2024 (Budget day), the following rates apply and continue into 2025/26.
| Asset type | Basic-rate band | Higher/additional-rate band |
|---|---|---|
| Shares, funds, second property and most assets | 18% | 24% |
| Business Asset Disposal Relief (lifetime £1m) | 14% | 14% |
A point that catches people out: which rate you pay depends on your total taxable income plus the gain. The gain is effectively stacked on top of your income. The part of the gain that falls within your remaining basic-rate band is taxed at 18 per cent, and any part above the higher-rate threshold (£50,270 of total income and gains) is taxed at 24 per cent. So a basic-rate earner with a large gain can still pay the 24 per cent rate on the slice that pushes them over the threshold.
Every UK-resident individual gets the £3,000 annual exempt amount automatically. There is nothing to claim. Trustees of most trusts get half the individual amount, £1,500 for 2025/26.
You need to report gains to HMRC if either of the following applies: you have a taxable gain after deducting the annual exempt amount and any losses, or your total proceeds (the gross sale amount, not the gain) exceed £50,000, which is four times the annual exempt amount. The proceeds test means you can be required to report even when no tax is due, simply because the sums involved are large.
For UK residential property specifically, the rules are stricter. You must report the gain and pay the estimated tax within 60 days of completion through HMRC's dedicated online service, regardless of your Self Assessment position. Missing this 60-day window triggers penalties and interest, and it is one of the most common CGT mistakes property sellers make.
Tom is a higher-rate taxpayer earning £70,000. In 2025/26 he sells a holding of shares he bought several years ago. He paid £20,000 and sells for £32,000, a gain of £12,000. He has no other gains or losses in the year.
Step one: deduct the annual exempt amount. £12,000 gain minus £3,000 exemption leaves a taxable gain of £9,000.
Step two: apply the rate. Because Tom's income already exceeds the £50,270 higher-rate threshold, the whole £9,000 gain is taxed at the higher-rate CGT rate of 24 per cent.
Capital Gains Tax due: £9,000 x 24% = £2,160.
Had Tom held these shares in an ISA, the entire gain would have been tax-free. And had he sold £3,000 worth of the gain in March and the rest in April, he could have used two years' worth of exempt amounts (£6,000 total) and reduced the taxable gain. The capital gains tax calculator lets you test exactly this kind of timing decision before you sell.
The annual exempt amount is the starting point, but several other rules can dramatically change your bill. Treating CGT as a single calculation rather than a stack of interacting reliefs is where overpayments creep in.
Allowable losses are deducted from gains before the annual exempt amount is applied. Current-year losses must be used in full against current-year gains, even if that wastes some of your exemption. Losses you cannot use this year can be carried forward indefinitely, but once carried forward they are only used to the extent needed to bring your gains down to the annual exempt amount, preserving the exemption. Reporting losses to HMRC, even in a year you make no gains, banks them for future use.
Transfers between spouses and civil partners who live together happen on a no gain, no loss basis, so no CGT arises on the transfer itself. This opens up two planning moves: shifting an asset to the lower-rate partner before a sale so the gain is taxed at 18 per cent rather than 24 per cent, and using both partners' £3,000 exemptions so a couple can shelter £6,000 of gains between them.
Your main home is normally exempt from CGT under Private Residence Relief. The interaction matters most for people with a second property or who have let out part of their home, where the relief is apportioned. The annual exempt amount then applies only to the non-exempt portion of the gain.
When you sell all or part of a qualifying business, Business Asset Disposal Relief can reduce the CGT rate to 14 per cent for 2025/26 (rising to 18 per cent from 6 April 2026) on up to £1 million of lifetime gains. The annual exempt amount is still deducted first, and the relief applies to the remaining qualifying gain.
Because the exempt amount is now so small and cannot be carried forward, timing has become the most valuable CGT planning tool for ordinary investors. Splitting a large disposal across two tax years uses two exemptions. Moving investments into an ISA in advance (bed and ISA) takes future growth out of CGT entirely. Crystallising gains up to the £3,000 limit each year resets your base cost without triggering tax. And realising losses in the same year as gains, where it makes commercial sense, reduces the net figure the rate is applied to.
A £3,000 allowance disappears fast in a market that has done well. The investors who stay ahead of CGT are the ones who use their exemption every year and think about which side of 6 April a sale should fall on.
If you are weighing up a sale of shares, a fund, or a second property, the single most useful thing you can do is model the tax before you commit. Use the capital gains tax calculator to see your taxable gain, the rate that applies given your income, and how splitting a disposal across tax years changes the outcome.
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