What actually counts as a capital gain

Capital gains tax is charged on the profit you make when you sell, gift or otherwise dispose of an asset that has increased in value. That could be shares held in a general investment account, a second home, a buy-to-let property, units in a fund, or even a piece of art or a collectible. The gain is the difference between what you paid and what you received — not the total sale proceeds. It is a common source of confusion, and an expensive one if you get it wrong.

Some assets sit outside the tax altogether. The main ones for most households are:

• Investments held in an ISA or a personal pension
• Your main home, provided you meet the conditions for private residence relief
• Premium Bonds and most UK government gilts
• Personal possessions worth £6,000 or less, with a separate £6,000 limit applied to sets

Everything else needs thinking about. Remember that gifts of assets to someone other than a spouse or civil partner count as disposals at market value, even if no cash changes hands.

The annual exempt amount: use it or lose it

Every individual has an annual exempt amount — a slice of gains that is tax-free each tax year. For 2025/26 it is £3,000. It has fallen sharply in recent years, so far more households now face a bill than used to.

Two points matter. First, the allowance is per person, not per household. A couple can realise up to £6,000 of gains between them before any tax is due. Second, it cannot be carried forward. If you don't use it by 5 April, it is gone.

If you are sitting on a large unrealised gain, it can be worth selling enough each year to use the allowance and rebuying later, or moving assets between spouses. Transfers between spouses and civil partners are treated as no gain, no loss, so the recipient keeps the original cost and can use their own allowance and rate band. Timing sales across two tax years is one of the simplest ways to keep a bill down.

Losses work differently: they must be reported to HMRC, usually within four years, and can be set against gains.

How the tax is calculated

Gains are taxed as the top slice of your income. In practice, that means your salary, pension and other income fill up your basic rate band first, and gains stack on top.

• For 2025/26, gains on most assets are taxed at 18% to the extent they fall within the basic rate band, and 24% above it
• Gains on residential property are charged at 24%
• You add taxable gains, after losses and the exempt amount, to your taxable income to see which band they land in

This is why two people with identical gains can pay different amounts. Higher earners often find their gains fall straight into the 24% band, while someone with moderate income may pay 18% on part of the gain.

Records that protect your money

You only pay tax on the gain, so every pound you can legitimately add to your base cost reduces the bill. Keep paperwork from the moment you buy.

• Purchase price and date, plus contract notes or completion statements
• Stamp duty land tax, stockbroker commissions, platform fees and legal costs on buying and selling
• Enhancement costs, such as a loft extension or new kitchen on a rental property, and capital improvements to shares or funds
• Inheritance tax valuations if you inherited the asset
• Details of reinvestment or rights issues, and records of previous sales that set your holding's cost

For shares and funds, you generally use the average cost of the holding, subject to special matching rules for purchases within 30 days of a sale. If you have lost track of the original cost, ask the platform or registrar — old statements can usually be retrieved, and it is far easier to do that now than to argue your case with HMRC later.

Shelters and simple planning steps

The most reliable way to avoid capital gains tax is to hold investments in a tax shelter. ISAs and pensions both grow free of CGT on disposals within them, which is why they are usually the first place to put money.

Where assets sit outside a shelter, a few habits help. Spread disposals across tax years. Use both partners' allowances. Sell assets that have fallen as well as those that have risen, so the losses offset the gains. Remember that dividends and interest are taxed under different rules, so don't confuse the two.

Reporting and paying on time

If your gains exceed the annual exempt amount, or your sale proceeds reach four times the allowance — £12,000 for 2025/26 — even where the gain itself is small, you usually need to report. Most people do this through self-assessment, with a deadline of 31 January following the end of the tax year.

Residential property is the exception: tax on a UK residential property gain must be reported and paid within 60 days of completion, using a separate online return. Late payment interest and penalties start quickly, so diary the date as soon as you exchange contracts.

None of this has to be daunting. Keep good records, use your allowances each year before they expire, and spread gains sensibly where you can. A few hours of admin in April can save hundreds of pounds later.