Capital Gains Tax: what is it and how to reduce your bill

Most people think about tax when they earn money. But what about when you sell something valuable – like shares, property, or a business? That’s where Capital Gains Tax comes in. It’s a tax on the profit you make when you sell an asset that’s increased in value. The key thing to understand? It’s the gain that’s taxed, not the total sale price.

How does Capital Gains Tax work in the UK?

If you sell something for more than you paid for it, the profit is called a ‘capital gain’. If the profit is higher than the annual tax-free allowance (more on that later), you’ll pay tax on the extra amount.

Here’s a quick rundown of what’s taxed and what isn’t:

Your main home may still be taxed if you’ve rented it out, used it for business, or if the land is over 5,000 square metres.

When do you pay Capital Gains Tax?

You have to report Capital Gains Tax yourself. How you pay and report on it depends on what you’ve sold.

If you sell a UK residential property and need to pay Capital Gains Tax, you must report and pay within 60 days of completion.

For all other items, you must report your gain by 31 December in the tax year after the sale, and pay your tax bill by 31 January – usually through your Self Assessment tax return.

Late payments can lead to interest and penalties, so staying on top of deadlines is important.

How much is Capital Gains Tax in the UK?

The amount of Capital Gains Tax you pay depends on your income. From 30 October 2024, the rates are simpler than before:

• If your total income is below £50,270, you’ll pay 18%
• If your total income is above £50,270, you’ll pay 24%

HMRC looks at your total income and capital gains together to decide what tax you owe. If your combined total goes over £50,270, only the portion above that threshold is taxed at the higher rate.

Example: how Capital Gains Tax works in practice

Understanding how Capital Gains Tax applies to real-life situations can make things clearer. Let’s break it down with a simple example:

• Your income is £45,000
• You sell a home and make a profit of £10,000

Since £45,000 (income) + £10,000 (profit) = £55,000, your earnings will take you into the higher tax band.

• The first £5,270 of your profit is taxed at 18% (the basic rate). Tax due = £948.60
• The remaining £4,730 is taxed at 24% (the higher rate). Tax due = £1,135.20

This means you owe £2,083.80 in tax. After tax, you’ll have made £7,916.20.

What is the Capital Gains Tax annual allowance?

For the current tax year, individuals receive a £3,000 tax-free allowance, and trusts receive  £1,500.

You can’t roll over unused allowance to future tax years. If you don’t use it, you lose it.

Seven strategies to reduce Capital Gains Tax

Capital Gains Tax means you don’t pocket the full amount when you sell a valuable asset. But smart planning can help you keep more of what you earn. Here are seven ways to potentially reduce your tax bill:

1. Use an ISA

Investments held in an ISA are completely tax-free. That means if your shares go up in value, you won’t have to pay Capital Gains Tax when you sell them. Plus, you won’t pay tax on any interest earned or dividends received.

2. Share profits with your spouse

You can give investments, property, or other valuable items to your spouse or civil partner tax-free. This helps you make the most of both your tax-free allowances and could reduce the total tax bill when the item is eventually sold.

3. Time your sales carefully

You get a tax-free allowance every tax year (currently £3,000). If you sell everything at once, you might go over that limit and owe tax. But if you sell some before the tax year ends and the rest after, you can use two years’ allowances and reduce what you owe.

4. Use losses to your advantage

If you’ve sold something for less than you paid, that’s a loss. You can use that loss to reduce the taxable amount when you sell something else for a profit – meaning you’ll owe less tax overall. For example, if you made a £5,000 profit on shares but lost £2,000 on a different investment, you’d only be taxed on £3,000.

5. Look at tax-friendly investments

Some investments, like Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), come with tax benefits. But these options come with risks, so they won’t be right for everyone.

6. Sell your main home tax-free

If the property you’re selling has always been your main home, you usually won’t pay Capital Gains Tax thanks to Private Residence Relief. But if you’ve rented it out or used part of it for business purposes, you might owe some tax. If you’re selling a second home or a property you’ve been renting out, you won’t get the same tax-free benefit as you would with your main home.

7. Check if you qualify for tax relief

If you’re selling a business (or shares in a business you helped build), you could pay a lower rate of Capital Gains Tax through Business Asset Disposal Relief. Instead of the usual 24%, you might only pay 10%.

Frequently asked questions on Capital Gains Tax

Do you pay Capital Gains Tax on inherited property?

You won’t pay Capital Gains Tax when you inherit a property. But if you sell it later, Capital Gains Tax will apply based on the property’s market value at the time of inheritance.

How much is Capital Gains Tax on shares?

The tax you pay on shares depends on your income and how much profit you make. From 30 October 2024, the Capital Gains Tax rates for shares are:

• 18% if your income is below £50,270
• 24% if your income is above £50,270

Is Capital Gains Tax going up?

It was announced in the Autumn Budget 2024 that Capital Gains Tax rates would increase, taking effect from 30 October 2024. For basic rate taxpayers, it increased from 10% to 18%, and for higher rate taxpayers, it increased from 20% to 24%.

Grow your lump sum with high-interest savings accounts

Selling a valuable item or asset often means you have a lump sum to manage. Leaving it in a low-interest account results in missing out on better returns. Instead, placing your money in a high-interest savings account can help you to grow your cash while keeping it safe in a low-risk environment.

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