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What is CGT?

Capital gains tax (CGT) may be payable on profits made from the disposal of certain assets. This is the increase in value between original purchase cost and the disposal proceeds. If this investment profit, the 'gain', is greater than the annual CGT exemption £3,000  (£6,000 2023/24)  there will be tax to pay.

What is a disposal?

A disposal for CGT purposes typically happens when ownership comes to an end. This is often when assets are sold, but also when assets are gifted outright or into trust.

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. So 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

Gifts made to other family members are treated as a disposal at the market value on date of transfer. Where no consideration is received, the deemed proceeds are taken to be the market value on date of transfer.

Which assets are liable to CGT?

CGT is payable on the profit you make on the disposal of most assets such as:

• stocks and shares, including mutual funds
• property that isn't your main residence
• business assets

However, not all assets are liable to CGT. Some of the more common types of asset that are free of CGT are:

• someone's main residence
• cash and foreign currency for personal use
• government issued gilts
• EIS and VCT shares which have benefited from income tax relief
• wasting assets, such as cars

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.

What rates of tax apply to CGT?

Individuals don't pay any CGT on total gains in a tax year up to £3,000 (£6,000 2023/24).  Any unused annual CGT exemption cannot be carried forward to future years.

Total gains over the £3,000 exempt amount are added on top of all other income to determine the rate of tax which will apply. 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 (formerly known as Entrepreneurs relief) allows the disposal of certain business interests to be taxed at 10%. 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 2025, the rate for CGT will increase to 14%, and from 6 April 2026 to 18%, on disposals up to £1M. 

CGT is payable at a flat rate of 20% (24% on gains from residential property) where a trust makes a disposal before 30 October 2024 and is assessable upon the trustees. Trustees pay CGT at 24% on all gains from 30 October 2024.  The annual CGT exemption for trustees is £1,500 (£3,000 2023/24), which is half of the personal exemption. This amount is shared between any other trusts created by the same settlor, subject to a minimum per trust of £300.

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 has to 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.

Calculating gains

A capital gain made on a disposal of an asset is, broadly, 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. This includes legal fees, estate agent fees, stockbroker fees and accountant fees. It doesn't include any fees payable for financial advice.

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.

Losses

Where an asset falls in value, this may create 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.

Therefore, some or all of the current year's annual exemption could be wasted if there are losses in that year.

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

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 20% or 24%. The personal representatives will receive a full annual allowance for the tax year of death and up to two subsequent tax years.

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.