Capital gains tax (CGT): a guide for UK investors

Any profit you make from selling an asset could be subject to capital gains tax (CGT). This could be as much as 24%, so it’s important you are aware of how CGT could affect you and factor it into your calculations when making investment decisions.

When is capital gains tax applied?

Capital gains tax is applied to any profit when you sell or dispose of almost any asset that is worth in excess of £3,000.[1] There are a few exemptions, such as gifting an asset to your spouse or civil partner or selling your car. In addition, there are several tax-free vehicles you can hold assets in, such as ISA and offshore bonds, where CGT is not applied.[2] Using a diverse range of CGT free tax wrappers effectively is key if you might be affected by CGT.

How to reduce the capital gains tax you pay

Using your annual CGT allowance effectively can be a key component of sophisticated financial planning. If you have investments held within a taxable account, a high-quality financial planner will look to make disposals on an annual basis to make use of your annual allowance and continually reduce the gains within your portfolio. They typically subscribe the sale proceeds to an ISA or re-invest them into a very similar investment fund before returning them to the original investments after 30 days have passed.[5] As I am sure you can gather, this is not a straightforward process, so it’s best to leave it to the professionals if you aren’t confident in how to achieve this.

How much capital gains tax do you pay on property?

One asset where it’s more challenging to make use of your annual CGT allowance is property. Unfortunately, you can’t sell portions of a property in the same way you can an investment portfolio, so gains can build up on buy-to-lets. Fortunately, CGT is not applied to your primary residence, but it is applied to any other properties you own. Currently, the same rates of CGT I mentioned earlier also apply when selling a second property as the higher rate was reduced from 28% down to 24% in April 2024.[6] Unfortunately, there is little you can do to avoid it, which can often make investing a more attractive option.

One of the few ways you can avoid paying CGT on a second home, or in fact on any asset, is by offsetting losses made on other disposals against the gain you have realised. This doesn’t have to be reported in the same tax year either, as losses can be claimed for up to four years from the point at which you made the disposal. Once reported, they can then be used to offset gains in future tax years. If you are already making use of tax wrappers such as ISAs and offshore bonds, you could also consider other options like venture capital trusts to reduce your CGT position further. It is important to remember, however, that these come with complications, are generally high risk, and are only appropriate in the right circumstance.

Capital gains tax can have a significant impact on your potential profits, so having a clear understanding of how and when it is applied is key to effective financial planning. It’s also important to ensure you are active in managing it, particularly when considering your investments. Managing CGT effectively can be reasonably complex so seeking professional advice early on is recommended to minimise its potential impact on your finances.