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What is CGT?

Capital gains tax (CGT) is the tax on profits made from the disposal of certain assets. CGT is payable on gains made by individuals, personal representatives and trustees. Companies are subject to corporation tax on any gains they make.

The capital gain is the increase in value between original purchase cost and the disposal proceeds. Tax is payable if the total of all gains made in the tax year after the deduction of any losses is greater than the annual CGT exemption.

What is a disposal?

A disposal for CGT purposes is when ownership comes to an end. This may be when assets are sold or gifted, including gifts into trust.

Generally, the timing of a disposal and acquisition will be the contract date. This may be different to the date when the asset is conveyed or transferred. If a contract is conditional, the disposal and acquisition are made when all the conditions are satisfied.

Where there is no contract, the general rule is that the date of disposal will be when the actual disposal or deemed disposal occurred.

When trustees transfer assets to a beneficiary the disposal date will be when the beneficiary became absolutely entitled to those assets.

Calculating gains

A capital gain made on a disposal of an asset is the difference between its value at the time of disposal and the cost of acquiring the asset. Certain costs directly incurred in acquisition and disposal can be deducted. These includes legal fees, estate agent fees, stockbroker fees and accountant fees. It doesn't include any fees payable for financial advice.

Any expenditure to enhance the value of the asset can also be deducted. For example, the cost of building an extension on a rental property. However, general property maintenance is typically not an allowable deduction.

Losses

Where an asset falls in value, this may result in a capital loss. Capital gains and losses incurred in the same tax year are offset against each other. This includes reducing gains down to zero even though some of the gain would otherwise have been covered by the annual exemption.

Any excess loss can be carried forward indefinitely. Carried forward losses may be offset against gains in future years. Unlike current year losses it's only necessary to offset sufficient carried forward losses against gains in excess of the annual exemption.

Example

Caitlin has gains in the current tax year of £10,000. She has also made a loss of £15,000 in the same year.

The loss will completely cancel out the gain and leave £5,000 of losses to be carried forward to offset gains in future tax years.

However, if the loss had been carried forward from an earlier tax year, she would only need to offset so much of the loss to keep the gain within the annual exemption.

This would leave a gain of £3,000 and £7,000 of losses which may be carried forward.

Losses can be offset in the most favourable way for the taxpayer. This means that if there are gains in the same tax year which are taxable at different rates, losses can be set against gains attracting the highest rate. For example, where there are some gains which are eligible for Business Asset Disposal Relief (BADR) and gains taxed at the ordinary CGT rates, it makes sense to offset losses against the non-BADR gains.

Annual exempt amount

Individuals are entitled to an annual CGT exemption of £3,000.  Any unused exemption cannot be carried forward to future years.

Legal personal representatives also receive an annual exemption of £3,000 for the tax year of death and up to two subsequent tax years for the death if the administration of the estate has not been completed.

Trustees receive an annual exemption of half the individual exemption £1,500. However, this amount is shared between all trusts created by the settlor subject to a minimum of £300 per trust where the settlor established more than five trusts.

Similar to the position with losses the annual exemption may be applied in the most favourable way. This means if there are gains which are subject to lower tax rates such as, Business Asset Disposal Relief (BADR) or pre 30 October 2024 gains, the exemption can be set against other gains taxable at the ordinary rates.

By allocating his AEA in this way he has saved £300 (£3,000 x [24%-14%])

Taxing the gain

Gains in excess of the annual exemption are added on top of all other income to determine the rate of tax which will apply. Any part of the gain which is within the unused basic rate tax band (£37,700) will be taxed at the lower rate of 18%. Gains exceeding the basic rate threshold are taxed at the higher rate of 24%.

Scottish taxpayers will use the rest of the UK basic rate band rather than the equivalent Scottish tax bands to determine the rate of CGT to apply.

Since 30 October 2024 there is no longer separate rates of CGT for disposals of residential property.

Remember that it's the amount of unused basic rate band which determines how much is taxed at the lower rate. It is not if total income plus gains are below £50,270 (£37,700 + £12,570). Therefore, where income is less than the personal allowance, the maximum amount of gain that could be taxed at the basic rate is £37,700. If a client has unused personal allowance, this cannot be set against capital gains.

Personal representatives pay CGT on gains arising during the administration period at a flat rate of 24% on amounts in excess of the full annual exempt amount.

Trustees must pay CGT at a flat rate of 24% on gains in excess of their annual exempt amount, which is typically half the personal annual exemption.

Interaction of capital gains with investment bond gains

Where an individual has incurred chargeable event gains on an investment bond in the same year as capital gains have been realised, only the average gain, or 'top sliced' gain, is included to determine the rate of CGT payable. 

Any part of the gain which is below the higher rate threshold is taxed at 10% and everything above it is taxed at 20%.

Business Asset Disposal Relief (BADR)

Business Asset Disposal relief (formerly known as Entrepreneurs relief) allows the disposal of certain business interests to be taxed at 14% (10% 2024/25). This applies to the first £1M of gains from self-employed businesses, partnerships and the sale of trading companies where an employee holds more than 5% of the shares in the company. 

From 6 April 2026, the rate of BADR will increase to 18% on disposals up to £1M. 

Valuations

The relevant valuations for CGT purposes will generally be the price paid for the asset and the sale proceeds. However, there are some exceptions to this.

• Assets acquired prior to 31 March 1982 will be revalued to the market value at this date.
• Inherited assets will be valued at the market value at the date of death.
• Disposals between spouses and civil partners are on a no gain/ no loss basis, with receiving spouse acquiring the asset at the original acquisition price.
• Disposals made to connected parties, such as family members other than a spouse or civil partner, are at the market value at the date of transfer.
• There are special rules to determine the value where only part of an asset is disposed of.

Obtaining the market value may require specialist advice such as an estate agent or auctioneer.

Certain assets such as shares and investment funds may have share or unit prices quoted daily. Transaction action histories can often help to determine the value of shares and funds which have been bought and sold on an investment platform.

However, sometimes it can be difficult to find historic prices which predate when assets were added to the platform or where there has been capital reorganisations, such as mergers or rights issues. In these circumstances specific advice from an accountant or stockbroker may be required, as they may have access to historic pricing and share history.

Share matching rules

There are special rules which apply when there's a disposal of shares (including shares or units in collective investments such as OEICs and unit trusts). These help to determine the acquisition cost of shares which may have been purchased on different dates. The rules also prevent the sale and an immediate buy back of the same shares in order to crystallise gains within someone CGT annual exemption.

When a disposal is made, the shares sold are matched with shares held in the following order:

• shares acquired on the same day as disposal (same day rule)
• shares acquired in the 30 days following the day of disposal (bed and breakfast rules)
• all other shares on an average cost basis (these are sometimes referred to as the 'Section 104 holding')

Where there have been shares purchased on different dates at different shares prices, all purchase costs are added together and then divided by the total holding to arrive at an average cost per unit. The same cost is then applied to each unit.

Exemptions

There's no CGT on certain assets and disposals.

Exempt assets

Not all assets are liable to CGT. Some of the more common types of assets that are exempt from CGT are:

• someone's main residence
• cash and foreign currency for personal use
• government issued gilts
• EIS and VCT shares which qualify for disposal relief
• wasting assets

Investors with onshore and offshore investment bonds are not subject to CGT on the investment gains they make. Gains on these investments are subject to income tax under the chargeable event rules.

Exempt disposals

Certain disposals are exempt from CGT:

• There's no CGT on gifts between spouses. The recipient of the gift simply takes over their spouse's acquisition cost of the asset. Any gain is deferred until the second spouse disposes of the asset.
• Gifts to charity are free of CGT.
• There is no CGT payable on death and the estate beneficiary will inherit the shares at the market value at the date of death.

Deferring the gain

It's possible in some circumstances for the gain on disposal to be deferred. This is possible where:

• holdover relief is claimed, or
• shares in an Enterprise Investment Scheme (EIS) are purchased.

Holdover relief

Gift holdover relief can allow gains to be deferred when assets are gifted. To qualify for the relief, the gift must be either business assets including unlisted trading company shares or any gift into a relevant property trust (discretionary trusts, non-qualifying interest in possession trusts).

The relief works by reducing the new owner's acquisition cost by the amount of the held-over gain.

EIS deferral relief

When a capital gain arises on the disposal of an asset, the gain can be deferred by purchasing shares in an EIS. The shares can be purchased up to one year before or up to three years after the disposal of the original asset. The deferred gain will be resurrected once there's a disposal of the EIS shares. There's no CGT on the investment growth on the EIS shares provided they've been held for three years.

CGT and death

Capital gains tax is not payable upon the death of an individual. Any gain or loss on assets held at death is ignored. If the assets are transferred to the beneficiaries of the deceased's estate, they're deemed to acquire the assets at the market value immediately before death.

On jointly owned assets the survivor acquires the deceased's share at the market value before death. On any future disposals there will be two acquisition costs used to calculate capital gains tax, their own share being half of the original amount invested and the value of the share immediatley before death, they inherited.

If assets are sold during the administration period, any gains made on disposal of assets by the legal personal representatives are subject to CGT at 24%. The personal representatives will receive a full annual allowance for the tax year of death and up to two subsequent tax years.

Residence

UK resident individuals will typically be subject to CGT on disposals of their worldwide assets.

Individuals who become UK resident having been non-resident for more than 10 tax years can elect to be taxed under the Foreign Income and Gains (FIG) regime. The FIG regime allows individuals to not pay UK tax on their overseas capital gains for the first 4 tax years of UK residency even if they are brought to the UK. They will continue to pay tax on their UK gains in the normal way.

Temporary non-residence

There is anti-avoidance legislation to prevent someone becoming non-UK resident for a short period, realising a gain which would not be subject to UK CGT, and then returning to the UK. An individual who becomes non-UK resident will still be liable to UK CGT if:

• the asset disposed of was owned before the person departed from the UK, and
• the person was UK resident for any part of at least four out of seven years before leaving the UK, and
• the individual becomes UK resident before five complete tax years have elapsed since the date of departure.

These rules do not apply to assets that are bought and sold whilst not UK resident. So investments bought after UK residence ceased, and sold whilst non-resident, will not be taxed on return to the UK after a period of temporary non-residence.

Reporting & paying CGT

Whether gains need to be reported depends on the size of the gain, and your tax return status.

Capital gains must be reported where the gain is greater than the annual CGT exemption of £3,000 or the total proceeds of sale exceeds £50,000. This is regardless of whether there's an overall taxable gain or not.

Trustees must report capital gains where the gain is greater than the annual CGT allowance of £1,500 or the sale proceeds exceed £50,000.  The same reporting amount is used even though Trustees only have up to half of the annual exemption. Trustees must also report gains that exceed their annual CGT exemption.

Gains are reported on the self-assessment tax return and payment is usually due by 31st January following the end of the tax year where the disposal occurred.

The exception to this is residential property. If you are UK resident and sell a residential property in the UK you must report and pay any capital gains tax to HMRC within 60 days of completion of the disposal. CGT reporting on disposals of residential property is through an online service, rather than self-assessment.

Trustees disposing of a UK residential property must also ensure any CGT is reported and paid within the above timescales, exactly the same as a UK resident individual.

Non-UK residents must continue to report sales or disposals of interests in UK property even when there is no CGT, within 60 days of completion through the same online service.

HMRC have introduced a real time reporting service for CGT. This can only be used if you don't normally complete a tax return. It allows those with one-off capital gains to avoid the need to complete a full self-assessment.

Losses may be carried forward indefinitely but need to be reported to HMRC within four years from the end of the tax year in which they arise.