What is Capital Gains Tax?

What Is Capital Gains Tax?

Capital Gains Tax (CGT) is a tax you pay on the profit (gain) you make when you sell, give away, or dispose of an asset that has increased in value.

Many businesspeople will utilise this tax to reduce their overall tax burden. For example, they will build the business, take a small wage, and then sell it, paying the 10% rate on disposal.

I have focused on the UK system as most systems around the world are similar.

You're taxed only on the gain, not the total sale price.

For example:

If you bought shares for £5,000 and sold them later for £8,000, your gain is £3,000 — that's the part HMRC may tax.

You might pay CGT when you sell or dispose of things like:

• Property that's not your main home (e.g. rental property or holiday home)

• Shares, investments, or cryptoassets

• Business assets (for the self-employed)

• High-value personal possessions worth over £6,000 (except cars)

Does It Matter If You're Employed or Self-Employed?

Yes — but only in terms of the types of assets you might sell and how you report them.

• Employed people: You pay CGT only when you sell or dispose of personal assets or investments (like a second property or shares). Your salary and wages are taxed separately through Pay As You Earn (PAYE). CGT doesn't affect your employment income.

• Self-employed people: You may also pay CGT on the sale of business assets, such as equipment, vehicles, or even goodwill, when you sell your business.

• However, you might qualify for special reliefs (like Business Asset Disposal Relief) that reduce the CGT rate.

So while the concept is the same, self-employed people often encounter CGT more frequently because they own business assets.

The 2025/26 Capital Gains Tax Rates and Allowances

Everyone has a tax-free allowance called the Annual Exempt Amount.

For the 2025/26 tax year, this allowance is £3,000 per person.

You only pay CGT on gains above that amount.

CGT Rates on Assets

Your rate depends on your income tax band (i.e. whether you're a basic-rate or higher-rate taxpayer):

Example:

You earn £40,000 a year and sell shares for a £10,000 gain.

• £3,000 is tax-free (Annual Exempt Amount)

• £7,000 is taxable.

• Since your total income keeps you in the basic rate band, you'll pay 10% CGT, which amounts to £700.

If your income plus the gain pushes you into the higher rate band, part may be taxed at 20%.

Capital Gains on Property

If you sell your main home, you usually don't pay CGT because of Private Residence Relief.

However, you'll pay CGT if you:

• Sell a second home, rental property, or holiday home

• Inherited a property and later sold it for a gain

• You can partly use your home for business or rent out part of it.

Capital Gains for the Self-Employed: Business Assets

If you're self-employed, Capital Gains Tax applies when you sell or close your business, or sell significant assets like:

• Business premises

• Equipment and vehicles

• Shares in a company you control

• The business itself (goodwill, customer base, etc.)

Business Asset Disposal Relief (formerly Entrepreneurs' Relief)

This relief lets you pay only 10% CGT on qualifying business gains up to a lifetime limit of £1 million.

You usually qualify if you:

• Are you a sole trader or business partner

• Have owned the business for at least 2 years

• Are you selling all or part of your business

This relief can make a huge difference when selling your business or retiring.

Ways to Reduce Your CGT Bill

Here are some legitimate ways to reduce the amount of CGT you pay:

1. Use your annual allowance — sell assets gradually over tax years to spread gains.

2. Offset losses — if you've sold other assets for a loss, you can use those to reduce taxable gains.

3. Share assets with a spouse/civil partner — transfers are tax-free and effectively double your allowances.

4. Claim Business Asset Disposal Relief if you're self-employed and selling your business.

5. Contribute to a pension or ISA — these are tax-efficient and can reduce your taxable income and gains.

Final Thoughts

Understanding how taxation works is crucial to helping you keep more of your money. Governments around the world have been living beyond their means for decades, and the debts need to be repaid, so they either cut spending or increase taxes. Therefore, it's more critical than ever to know how to keep more of what you earn.