What Capital Gains Tax Actually Is

Capital Gains Tax (CGT) is charged on the profit — the gain — you make when you dispose of an asset that has risen in value. It is not a tax on the full amount you receive, and it is not a tax on money you have not yet realised. Until you sell, there is nothing to report.

"Dispose" sounds formal, but it covers more than a straightforward sale. Giving an asset away, swapping one investment for another, or transferring shares into someone else's name can all count. For most beginners, though, disposal means selling shares, funds or investment trusts held outside a tax wrapper.

That distinction matters more than anything else here. Investments held inside an ISA or a pension are not subject to CGT at all. If everything you own sits in those wrappers, this tax simply does not apply to you. It becomes relevant when you hold investments in a general investment account, or you own shares directly through a broker with no wrapper around them.

Working Out Your Gain

The calculation is more straightforward than the jargon suggests. For each disposal, you start with what you received and strip out what the investment cost you, along with the expenses of buying and selling.

• Start with the sale proceeds — what you actually got, after any commission was deducted.
• Deduct the acquisition cost — what you originally paid for those shares or units.
• Deduct buying costs such as stamp duty and dealing charges.
• Deduct selling costs such as broker commission or platform exit fees.

What is left is your gain. Add up all your gains for the tax year, which runs from 6 April to 5 April, and then subtract any losses you made on other disposals in the same year. Losses can be offset against gains before any allowance is applied, which is why it is worth reviewing your whole portfolio rather than looking at one sale in isolation.

If you have made a loss in a previous year that you never used, you can usually carry it forward, but you must have claimed it within four years of the end of the tax year in which it arose. Losses are not automatically applied — they need to be reported.

Your Annual Allowance

Everyone has an annual exempt amount, which for recent tax years has been £3,000. Gains up to that figure are free of CGT. Anything above it is taxable.

The rate you pay depends on your income. Your taxable gain is added on top of your other income to work out which band it falls into. Basic-rate taxpayers generally pay 10% on gains from shares and funds, while higher and additional-rate taxpayers pay 24%. Residential property carries its own rates, which are higher. Rates and allowances do change, so it is worth checking the current figures on the government's website before you file.

Two practical points follow from this. First, because the allowance is annual and cannot be carried forward, spreading disposals across tax years can keep more of your gains sheltered. Second, if you are married or in a civil partnership, you each have your own allowance and your own rate band — transferring assets between you is generally free of CGT, so it can be worth holding investments in the name of the partner with the lower income.

The 30-Day Rule and Share Pooling

If you sell shares and then buy the same shares back within 30 days, special matching rules apply. The shares you buy back are matched against the ones you sold, rather than against your older holdings, which can produce a very different gain from the one you expected. This catches out people who sell to "lock in" a gain or a loss and immediately repurchase.

Shares bought on different dates and held for longer are pooled together. Rather than tracking each purchase separately, you keep a single average cost for your holding in that company, and the gain is calculated against that average. It means good record-keeping from day one saves a great deal of pain later.

Reporting and Paying

You need to tell HMRC about your gains if they exceed the annual allowance, or if your total sale proceeds exceed £50,000 — even when your gain is below the allowance. That second condition surprises people, so check your total disposal value, not just your profit.

• If you already complete a Self Assessment return, report the gains there, with the tax due by 31 January following the end of the tax year.
• If you do not normally file a return, you can register for Self Assessment, or use HMRC's real-time Capital Gains Tax service to report and pay without registering.
• If you sell UK residential property, different and much tighter deadlines apply — generally 60 days from completion.

Payments on account may also apply if your bill is large enough, meaning you pay some of next year's tax upfront. It is worth budgeting for that rather than being caught short in January.

Keeping Records and Avoiding Common Slips

Good records are the whole game. Keep contract notes, statements and confirmation of every purchase and sale, including the dates and the fees. Platforms do not always hold decades of history, and if you cannot evidence your acquisition cost, HMRC may assume it was nil — which is an expensive assumption to argue with.

Other traps worth knowing: reinvesting dividends does not reset your base cost in a helpful way and each reinvestment adds to your pool; transfers between spouses are treated as no-gain, no-loss, so the receiving partner inherits the original cost; and gifts to adult children are disposals at market value, even though no money changes hands. Finally, remember that unused allowances cannot be reclaimed later. If you have gains to realise and room under the allowance, using it in a quiet year is rarely a bad idea. Tax rules shift, so take advice on your own circumstances before acting.