What is capital gains tax?

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As more of us invest in shares, sell or own multiple properties, buy cryptocurrencies, or pass assets to family members, CGT is becoming increasingly relevant. The recent freezing of tax free allowances alongside changes to CGT rates, mean it’s more important than ever to understand how the rules apply.

Different assets are taxed in different ways, but there are several important exemptions, and the calculations are not always clear. Many people do not realise that gifting assets, swapping crypto, or selling personal valuables can all trigger CGT. Without a clear explanation, it is easy to make mistakes or pay more tax than necessary.

In this guide, we explain what capital gains tax is, when it applies, how to calculate it, which reliefs might reduce your bill, and the practical steps you can take to avoid common pitfalls.

Capital gains tax explained

Capital gains tax is a tax on the profit you make when you dispose of an asset that has increased in value. 

The key word here is ‘profit’. For example, say you bought an asset for £4,000 and later sold it for £10,000, your gain is £6,000. CGT applies only to the gain; not the full £10,000 you received.

If assets like your shares, crypto, or property have increased in value, but you are still holding them, no CGT is due until the day you sell or otherwise dispose of the asset.

It’s worth considering that any losses you make can actually reduce your tax bill. If some assets have increased in value while others have fallen, you can offset the losses against the gains. This is an essential part of tax planning and something investors often overlook.

Which assets are subject to CGT?

Capital gains tax applies to a wide range of assets. These include:

• shares and certain investment funds,
  
• second homes and buy-to-let properties,
  
• business assets,
  
• cryptocurrencies, tokens and other crypto assets,
  
• valuable possessions worth more than £6,000 like art, antiques, and luxury jewellery.
  

These examples are known as “chargeable assets”, meaning they aren’t exempt from CGT. If you sell, gift or transfer assets (known commonly as disposing of them) that have made a profit, you may be liable for paying CGT on those assets.

Some assets are usually exempt from capital gains tax. These include your main home if it qualifies for Private Residence Relief, personal cars, ISAs, pensions, UK government bonds, and personal items below the £6,000 limit.

Many people also do not realise that items with a lifespan under 50 years, like certain machinery or equipment, can be exempt from CGT as wasting assets.

Wasting assets are items or possessions that don’t last very long (usually less than 50 years) because they wear out or lose value quickly, like certain tools or machinery. Because of this, they typically aren’t included in capital gains tax calculations.

What does ‘disposal’ mean in relation to CGT?

Most people think ‘disposal’ means selling an asset, but the rules go wider. You dispose of an asset if you:

• sell it,
  
• give it away,
  
• swap it for something else,
  
• transfer it to someone who is not your spouse or civil partner,
  
• receive compensation because it has been damaged or destroyed.
  

This means actions that appear harmless can trigger CGT. For example, gifting expensive artwork or shares to a family member counts as a disposal. Digital assets aren’t exempt either, as you may also trigger CGT if you swap one form of crypto for another, even if you never convert anything back to pounds.

However, transfers between spouses and civil partners are usually free of CGT. This is a valuable rule that allows couples to share allowances and reduce tax bills through careful planning.

For additional information on how capital gains tax can affect you and change depending on your unique circumstances, it’s recommended that you speak to a financial adviser for expert insight.

What are capital gains tax rates?

The rate of capital gains tax that you pay depends on your income level and the type of asset involved. For most assets like shares, funds, or crypto, the main capital gains tax rates are:

• Basic rate - 18% 
  
• Higher and additional rate - 24% 

The main rate of CGT for trustees and personal representatives is 24%.

Business disposals and Capital Gains Tax

Some business disposals may qualify for specific Capital Gains Tax reliefs, including Business Asset Disposal Relief and Investors’ Relief.

Qualifying gains are taxed at 18%, although eligibility depends on your circumstances. You can check the latest GOV.UK guidance on Capital Gains Tax relief for businesses or speak to a tax professional if you’re unsure. 

How to calculate capital gains tax

CGT calculations typically follow a similar pattern, even among varying asset classes.

Here is the process broken down clearly.

Step 1. Work out your sale proceeds

Begin with the amount you received when you sold the asset. If the asset was gifted or transferred, use the fair market value at the time of the gift rather than zero. This ensures the calculation reflects the real economic gain.

Step 2. Deduct allowable costs

Next, subtract any costs directly related to buying or improving the asset. These may include the original purchase price, broker or transaction fees, legal fees, and for any costs of improvements that add value (for example, kitchen renovations). Routine repairs and maintenance do not qualify.

Step 3. Calculate the gain for each asset

For every asset you disposed of during the tax year, subtract the allowable costs from the sale proceeds. This gives you the individual gain or loss for that specific asset.

Step 4. Combine all gains and losses

Add together all gains from the tax year and deduct any allowable losses. Losses from the same year must be used automatically. If you have previously reported losses from earlier tax years, these can also be brought forward to reduce the total.

Step 5. Subtract the annual exempt amount

The Annual Exempt Amount, currently £3,000 for individuals and personal representatives, and £1,500 for most trustees, is then deducted from the combined total. If your remaining gain is lower than this allowance, no CGT is due.

Step 6. Apply the correct CGT rate

Finally, apply the CGT rate that matches both your income tax band and the type of asset involved. Most assets are taxed at 18% or 24% (or a flat rate of 24% for trustees and personal representatives).

How to avoid capital gains tax

It's worth noting before going into tax saving measures that there’s no way to avoid paying capital gains tax if it’s owed.

However, there are several ways to significantly reduce the amount of CGT you pay with proper financial planning.

Use your annual exempt amount every year

If you regularly invest, you can sell some assets each year to make use of your tax-free allowance rather than allowing gains to build up.

Share ownership with a spouse or partner

Transfers between spouses are free of CGT. This allows you to use two allowances and possibly keep gains within lower tax bands.

Use tax free accounts

Investments held inside ISAs or pensions do not incur CGT. Moving assets into these accounts over time can significantly reduce future tax bills.

Harvest losses

Selling poorly-performing assets in a controlled way can offset gains and reduce capital gains tax. Some investors do this toward the end of the tax year.

Plan the timing of disposals

If your income is likely to be lower next year, your CGT rate could also be lower. In some cases, delaying a sale can reduce tax.

Consider business asset disposal relief (BADR)

If you run a business or hold shares in one, BADR may allow you to pay CGT at a reduced rate of 14% (18% from 6 April 2026) on qualifying gains.

How to report and pay capital gains tax

You can report gains through your Self Assessment tax return or by using HMRC's real-time capital gains tax service. Property sales that require you to pay CGT must be reported within 60 days of completion.

Deadlines matter, and late filings can trigger penalties, while late payments can lead to interest charges. Keeping records of all purchase costs, fees, and improvement expenses is essential in case HMRC requests evidence.

Need help managing tax on your investments?

Understanding capital gains tax is one thing; applying it to your personal financial situation is another.

If you want support with managing tax on your investments, planning future disposals, or making the most of available allowances, LV=’s financial adviser services can help.

LV= offers guidance and products designed to support long term financial planning, including investment solutions that could help reduce the impact of tax over time.

If you would like personalised support tailored to your goals, you can learn more with our investment guides or request a call back today.

Capital gains tax FAQs

What is capital gains tax on inheritance?

Often confused with inheritance tax, capital gains tax can apply to inherited assets, but only under certain conditions.

For example, you may have to pay capital gains tax if you sell an inherited item, but only if it has increased in value significantly in the time since the person you received the item from has passed on.

Do I pay capital gains tax on my main home?

It’s uncommon that you pay CGT on your main home as most people benefit from Private Residence Relief, which removes tax on any gain from selling their main home.

To qualify, the property must have been your main residence for the entire period you owned it, and it must not have been rented out, used significantly for business, or excessively large without good reason. 

If any of these conditions are not met, partial relief may apply.

Do I pay CGT when gifting assets to someone?

It depends on who you are giving them to. Gifts assets to a spouse or civil partner are usually free from CGT, which means you can transfer assets without triggering a tax bill.

Gifts to anyone else are treated as if you sold the asset at market value. This means you may owe CGT even though you received no money.

Can you offset capital gains tax with pension contributions?

No, pension contributions can’t directly offset capital gains tax. Capital gains and pension tax relief are treated separately by HMRC.

However, pension contributions can reduce your taxable income, which may move you into a lower capital gains tax band, meaning you pay CGT at a lower rate.

You’ll also still benefit from income tax relief on the pension contribution, helping reduce your overall tax bill.