Capital gains tax, or CGT, sounds technical, but the concept is simple.
When you sell an investment or asset for more than you paid, the profit is a capital gain. If it falls outside your tax-free allowance, you may owe tax on the profit.
It matters because as your wealth grows, small adjustments in how you manage gains can make a big difference to your long-term returns.
You pay CGT when you sell or dispose of assets that have increased in value.
That could include:
You are only taxed on the gain, not the total sale value.
Every individual has a CGT allowance each tax year, known as the annual exempt amount. For the 2025–26 tax year, this is £3,000 per person.
That means you can realise up to £3,000 of gains each year before any tax is due.
If you are married or in a civil partnership, you can both use your allowances, effectively doubling the tax-free amount.
Because the allowance is annual, it is “use it or lose it.” You cannot carry it forward to future years.
For most investments, capital gains are taxed at:
For residential property that is not your main home, the rates are 18% and 28%.(at the time of writing)
The actual rate depends on your total taxable income and how the gain pushes you through the tax bands.
The simplest way to avoid CGT is to hold investments in ISAs or pensions.
ISAs are completely free from income and capital gains tax. Once inside, you never pay CGT again.
Pensions shelter growth from CGT and income tax until you withdraw funds, and contributions attract tax relief.
By using these wrappers, you can grow investments without worrying about selling at the wrong time for tax reasons.
If you hold investments outside ISAs or pensions, there are ways to manage gains efficiently:
1. Bed and ISA
Each year, you can sell assets outside your ISA and repurchase them within it, effectively moving investments into a tax-free environment.
This lets you use your CGT allowance gradually while building your ISA holdings.
2. Offset losses
If you sell an investment at a loss, you can use that loss to reduce other taxable gains in the same year or carry it forward to offset future gains.
3. Spread disposals across tax years
If you are sitting on a large gain, consider selling part of the investment before 5 April and part after, using two years’ allowances.
4. Transfer between spouses
You can transfer assets between spouses or civil partners without triggering CGT, allowing you to use both annual exemptions and tax bands efficiently.
Do not repurchase the same investment immediately in your own name, as that can break the 30-day “bed and breakfasting” rule. If you want to buy back straight away, use your spouse’s account or an ISA.
Do not ignore small gains, because they can build up quickly.
Do not hold everything outside wrappers, as the tax drag compounds over time.
A practical example
Alex sells £20,000 of shares that he bought for £15,000. The gain is £5,000.
His CGT allowance is £3,000, so £2,000 is taxable.
Because he is a higher rate taxpayer, the tax due is 20%, or £400.
If Alex had sold part this year and part next tax year, or transferred a portion to his spouse, the entire gain could have been tax-free.
Small bits of planning, done each year, are far more effective than big one-off actions.
Capital gains tax is not something to fear, but it does reward organisation.
By using your annual allowance, holding investments in ISAs or pensions, and managing timing smartly, you can keep more of your returns and stay on the right side of HMRC.
Tax rules change, but good habits last. Build those habits now.
If you would like to review your investment structure and make sure you are using your allowances efficiently, book a 20-minute tax planning review.
Nic Round is a Chartered Financial Planner and Chartered Wealth Manager, authorised and regulated by the Financial Conduct Authority.