Capital Gains Tax, almost always shortened to CGT, is the tax you pay on the profit when you sell or otherwise dispose of something that has gone up in value. The key word is profit. You are taxed on the gain, not on the whole amount you receive. Sell an asset for less than you paid, and there is no gain to tax at all. This guide explains CGT as a mechanism: what triggers it, how the gain is worked out, how the rate is set, and which assets escape it entirely.
We use round illustrative numbers throughout so the logic stays clear, then point you to a calculator for the live thresholds and rates, which change from time to time.
What CGT actually taxes
CGT is charged on the gain, which is broadly the disposal proceeds minus what the asset cost you, adjusted for certain allowable expenses. A “disposal” is wider than just selling. It includes giving an asset away, swapping it for something else, or receiving an insurance payout when something is destroyed.
The gain is not the sale price. Suppose you buy an asset for £20,000 and later sell it for £35,000. Your gain is £15,000, not £35,000. You can also deduct costs directly tied to buying and selling, such as legal fees, agent fees, or the cost of improvements that added value. Those deductions shrink the taxable gain.
Crucially, CGT only bites when you dispose of the asset. While you hold it, growth on paper is not taxed, however large it gets. This is why timing a disposal matters so much.
The annual exempt amount
Every individual gets an annual exempt amount, a slice of gains each tax year that is free of CGT. You only pay tax on total gains above this allowance, added across all your disposals in the year.
The allowance works like a yearly free band. If your combined gains for the year sit below it, there is no CGT and often nothing to report. Go above it, and only the excess is taxable. The allowance does not roll forward. Unused exemption is lost when the tax year ends on 5 April.
This creates a simple planning lever. Spreading disposals across two tax years can use two years’ worth of exemption rather than one. Married couples and civil partners have a further advantage: transfers between them are normally tax-neutral, so an asset can be moved into joint names before sale to use both allowances. Our capital gains tax calculator applies the current exemption so you can see the taxable portion of a gain.
How the rate is set: CGT stacks on top of income
This is the part people miss. The CGT rate you pay is not fixed. It depends on how much of the basic-rate income band you have left after your income is counted. In effect, your taxable gain is stacked on top of your income, and the portion that still falls within the basic-rate band is taxed at the lower CGT rate, while anything above it is taxed at the higher CGT rate.
Two more wrinkles matter:
- Residential property that is not your main home, such as a buy-to-let or second home, is taxed at higher CGT rates than other assets like shares.
- Other assets, including most shares and funds held outside a tax wrapper, are taxed at the lower set of rates.
A worked example with round numbers
Suppose the basic-rate income band runs up to £50,000, and a person has £40,000 of taxable income. That leaves £10,000 of basic-rate band unused.
Now they make a £30,000 taxable gain on shares (after the annual exempt amount). Stacking the gain on top of income:
| Slice of gain | Falls in | CGT rate band |
|---|---|---|
| First £10,000 | Remaining basic-rate band | Lower rate |
| Next £20,000 | Above basic-rate band | Higher rate |
Only the first £10,000 gets the lower rate; the rest is taxed at the higher rate. Someone with more income would have less basic-rate band left, so more of the same gain would be taxed at the higher rate. This interaction is exactly why CGT and income are best modelled together. Our take-home pay calculator helps you see where your income leaves the basic-rate band before gains are stacked on.
Which assets are exempt
A lot of common assets sit entirely outside CGT, which is why most people never pay it.
- Your main home is normally covered by Private Residence Relief, so selling the home you actually live in usually produces no CGT.
- ISAs and pensions shelter investments completely. Gains on shares and funds inside an ISA or a pension are free of CGT, full stop.
- Personal cars are exempt.
- Cash in sterling is not an asset for CGT, though foreign currency held as an investment can be.
- Gilts and most premium bonds winnings sit outside CGT.
The ISA point is the most powerful for ordinary investors. Holding shares or funds inside a stocks and shares ISA removes the CGT question entirely, no annual exemption to track, no rate calculation, no reporting. Our cash ISA vs stocks ISA calculator compares sheltered investing against holding the same assets in a taxable account.
Gains, losses, and how they net off
Losses are not wasted. If you dispose of an asset at a loss, that loss can be set against gains made in the same tax year, reducing the total taxable gain. If losses exceed gains, the surplus can usually be carried forward to future years, provided you report it in time.
The order matters. Current-year losses are set against current-year gains first, even if that wastes some annual exemption. Carried-forward losses are then used only as far as needed to bring gains down to the exempt amount, preserving the rest for later. This is a subtle but useful feature: you rarely have to burn old losses to cover a gain the exemption would have covered anyway.
Reporting and paying
How and when you report depends on the asset.
- UK residential property disposals that produce a taxable gain generally have to be reported and the tax paid within a tight window after completion, separately from the main tax return. This catch-out surprises many sellers of second homes.
- Other assets are normally reported through Self Assessment, with the tax due by the usual filing and payment deadlines.
If your total gains are within the annual exempt amount and your total proceeds are modest, you may not need to report at all. The thresholds for mandatory reporting change, so check the current rules before assuming you are clear.
Frequently asked questions
Do I pay CGT when I sell my own home?
Usually no. The home you live in as your main residence is normally covered by Private Residence Relief, which removes the gain from CGT. Complications can arise if you let part of it out, used part exclusively for business, or have very large grounds, but for a typical home that you have lived in throughout, there is generally no CGT.
Is the CGT rate the same for everyone?
No. The rate depends on how much of your basic-rate income band is left after your income is counted. Gains falling within the remaining basic-rate band are taxed at the lower rate, and gains above it at the higher rate. Residential property that is not your main home is taxed at higher rates than other assets.
Can I avoid CGT by holding shares in an ISA?
Yes. Shares and funds held inside a stocks and shares ISA are completely free of CGT, with no annual exemption to track and nothing to report. Moving investments into an ISA over time, within the annual ISA allowance, is one of the simplest ways to shelter future gains.
What happens to losses I make?
Losses set against gains in the same year first. Any surplus can usually be carried forward to reduce gains in later years, as long as you report the loss within the time limit. Carried-forward losses are only used as far as needed to bring gains down to the annual exempt amount, so you do not waste them.
Primary sources
- Capital Gains Tax, GOV.UK
- Capital Gains Tax: what you pay it on, rates and allowances, GOV.UK
- Tax when you sell shares, GOV.UK
- Tax when you sell property, GOV.UK