Capital gains tax is one of those taxes that tends to arrive as a surprise. You sell a buy-to-let flat, dispose of some shares, or hand over a business you’ve spent years building — and then, months later, you find out there’s a tax bill attached. Understanding what capital gains tax is and when it applies is not just useful knowledge; it can genuinely change the decisions you make and the timing you choose.

The good news is that CGT is not as complicated as it first appears. At its core, it’s a tax on the profit you make when you dispose of a valuable asset — not the full sale price, just the gain. Knowing the current rates, the annual allowance, and the reliefs available puts you in a much stronger position than most people who encounter this tax for the first time.

Here’s how we explain it to clients who come to us with a disposal on the horizon.

Capital gains tax (CGT) is a tax on the gain — the increase in value — when you dispose of a capital asset. The key word is gain. If you bought shares for £10,000 and sold them for £25,000, CGT applies to the £15,000 profit, not the full £25,000 sale price.

Disposing of an asset covers more than just selling. HMRC treats gifts, swaps, and compensation payouts as disposals too — so passing an asset to a family member can trigger a CGT charge even if no money changes hands.

CGT applies to a broad range of assets: investment properties, shares and funds held outside an ISA, personal possessions worth more than £6,000, business assets, and the proceeds from selling an entire business. Your main home is generally exempt under Private Residence Relief, which is why most people’s first encounter with CGT comes from a second property or investment portfolio rather than their family home.

If your total gains in a tax year fall below the annual exempt amount, there’s nothing to pay. For 2025/26 and 2026/27, that threshold is £3,000 for individuals — a significant reduction from where it stood just a few years ago, which means far more people are finding themselves with a reportable gain than before.

The rate of CGT you pay depends on two things: the type of asset and your income tax band. It’s worth being clear on both before you assume what your bill might look like.

Residential property

For investment properties and second homes, the rates for 2026/27 are 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers. These are the same rates that applied in 2025/26.

Other assets (shares, business assets, etc.)

For assets other than residential property, basic rate taxpayers pay 18% and those in the higher or additional rate band pay 24%. This is a notable change from earlier years when these rates were lower — gains from shares and business assets now attract the same rates as property, which has shifted the planning picture for many investors.

How your income affects the rate

Your CGT rate isn’t determined solely by the size of the gain — it interacts with your income. If your income plus your gain takes you into higher rate territory, the portion of the gain above the basic rate band is taxed at 24%. It’s possible to straddle two rates in the same year, which is one reason CGT calculations are worth doing carefully before a disposal rather than after.

The annual exempt amount of £3,000 is deducted from your gains first. Any allowable losses — including losses brought forward from previous years — are applied before working out the final figure.

For owner-managed businesses, CGT is most commonly encountered at two points: when selling business assets, and when eventually selling or winding down the business itself. It’s an area where early planning makes a real difference.

Business Asset Disposal Relief

One of the most valuable reliefs available to business owners is Business Asset Disposal Relief (BADR) — formerly known as Entrepreneurs’ Relief. If you qualify, it reduces the CGT rate on the first £1 million of lifetime qualifying gains. For 2025/26 the BADR rate is 14%; from April 2026 it rises to 18%. Both rates are still well below the standard 24% that would otherwise apply, so if you’re planning to sell a business or significant business assets, understanding whether you qualify for BADR is genuinely worth a dedicated conversation with your accountant.

To qualify, you generally need to have been a director or employee of the company for at least two years, and hold at least 5% of the ordinary shares and voting rights. The rules have more nuance than that summary suggests, and getting the eligibility wrong is costly.

Selling shares versus selling assets

If you operate through a limited company, a buyer may want to purchase the business’s assets rather than the shares in the company. This distinction changes who pays CGT, at what rate, and whether reliefs like BADR apply. It’s one of the reasons we encourage business owners thinking about an exit to take advice well before negotiations start — not at the point of signing.

For more on how entrepreneurs’ relief works in practice, see our related post on entrepreneurs relief.

One of the most common CGT mistakes we see is missing a reporting deadline, particularly for property. If you sell a UK residential property and make a taxable gain, you must report and pay the CGT within 60 days of completion. This is separate from your Self Assessment tax return — it’s done through HMRC’s online CGT on UK property service, and it applies even if you’d normally file a return anyway.

Missing the 60-day deadline results in automatic penalties and interest, and HMRC has become increasingly active in chasing late reports. The rule has been in place since 2020, but it still catches people out, particularly those managing the sale themselves without professional help.

For gains on other assets — shares, personal possessions, business assets — CGT is reported through your Self Assessment tax return for the relevant tax year. The deadline is 31 January following the end of the tax year in which the disposal occurred.

There are also some common errors worth watching for: using the wrong year’s annual exempt amount (the allowance has changed significantly over recent years), failing to apply brought-forward losses before calculating the gain, and misreporting the allowable costs you can deduct. Legal fees, stamp duty paid on acquisition, and the cost of improvements to a property can all reduce your chargeable gain — but only if they’re claimed correctly.

We work with a range of clients who encounter CGT in quite different ways, so it’s worth flagging a few specific areas where the rules trip people up.

Cryptocurrency

HMRC treats cryptocurrency as a capital asset, not currency. Every disposal — whether you sell crypto for cash, swap one coin for another, or use crypto to buy goods — is a taxable event. The gains can add up quickly in a volatile market, and many people underestimate their liability because they’ve never received a statement in the way they would from a stockbroker. We’ve seen clients come to us with several years of undeclared crypto gains, which is a situation that’s much easier to resolve before HMRC raises an enquiry.

Shares and investment portfolios

Gains on shares held outside an ISA are subject to CGT. With the annual exempt amount now at just £3,000, regular investors who rebalance portfolios or take profits are more likely than ever to have a reportable gain in a given year. Bed-and-ISA strategies — selling shares and immediately buying them back inside an ISA — can be worth considering when planning ahead, though the mechanics matter.

Property investors

For landlords and property investors, CGT on residential property is a significant cost to factor into any disposal decision. We’ve written more on this specifically in our post on capital gains tax on property.