What is Capital Gains Tax?
Simply put, CGT is a tax paid on the profit made when disposing of a chargeable asset that has increased in value. A disposal includes selling, gifting or transferring assets.
Assets that are chargeable to CGT include, but are not limited to, the following:
- Business assets
- Most shares (some exclusions apply, such as shares in an ISA)
- Land and property (unless it is your main home, provided you have not let it out, nor used it for business, and it is not - together with its garden and grounds - exceptionally large)
- Most personal possessions worth £6,000 or more, apart from your car, and moveable property with a useful life of 50 years or less
Annual Exemption
The CGT annual exemption for 2025/26 is £3,000 for individuals. Gains within this amount do not incur CGT. This exemption is in addition to the personal allowance for income tax purposes.
The £3,000 is a ‘use it or lose it’ exemption; it cannot be carried forward to future years. It may therefore be beneficial for tax purposes to realise gains each year to the extent of the annual allowance, if possible.
It should be noted that transfers between spouses are deemed to be at “no gain, no loss”, which means no tax charge should arise on transfer and that the recipient effectively assumes the donor spouse’s base cost. This means that spouses can plan to maximise the benefit of both annual exemptions.
Consideration should therefore be given to using each year’s £3,000 exemption by realising gains prior to the tax year end on 5 April, where appropriate.
Rates of Tax
The Autumn Budget on 30 October 2024 announced an overhaul of the rules. The changes in rates can be summarized as follows:
This means that where the total taxable gains and income are within an individual’s basic rate band, CGT is now taxed at 18%. Excess gains are now taxed at 24%.
In some cases, Business Asset Disposal Relief (“BADR”, previously known as “Entrepreneurs’ Relief”) may apply to give lower rates as explained below.
Investment Property
The position on CGT rates for investment property has also changed and can be summarized as follows:
This represents a notable increase for non-residential property from 30 October 2024. Taxable gains on the sale of UK residential property must be reported by a UK resident to HMRC within 60 days of completion of the sale. Interest and penalties may apply if they do not report and pay the tax on time and the 60-day return does not preclude the need to file a self-assessment tax return.
Non-residents will have similar obligations where directly or indirectly disposing of a residential or non-residential land and property.
Business Asset Disposal Relief (BADR) and Investors’ Relief
This relief covers certain gains subject to a lifetime limit of £1m. BADR will be limited for the 2025/26 tax year, and again for the 2026/27 tax year, as follows:
As a result, from 6 April 2026, BADR will only be worth a maximum of £60,000 per person.
Careful consideration should be given to realising gains at current rates where possible, given that the current BADR position is only available until 5 April 2026. There are anti-avoidance provisions to help limit the risk to HMRC of artificially accelerated transactions to obtain a lower rate.
BADR applies to the sale of a trading business carried on as a sole trader or partnership, or to the sale of shares in a personal trading company. It can also apply to personally held assets that have been used in the trade of a partnership that you are a partner in or a company that you are a shareholder of. There are other conditions to be met for BADR to apply.
Business owners should regularly review their BADR position as it is easy to fall foul of the detailed rules.
Investors’ Relief was previously limited to £10m of lifetime gains. This was reduced to £1m from 30 October 2024.
Business owners should regularly review their BADR position as it is easy to fall foul of the detailed rules.
Steven Tebbutt, Partner at MHA
Employee Ownership Trusts (EOTs)
An Employee Ownership Trust (EOT) can facilitate the disposal of a company or group to a trust established for the benefit of all employees.
Where various conditions are met, only 50% of an individual’s gains on the disposal to an EOT will be subject to CGT, giving an effective rate of 12% for higher rate taxpayers, or 9% for basic rate taxpayers, on an unlimited amount of gains.
The conditions for EOTs were strengthened with effect from 30 October 2024 to help prevent tax avoidance and to ensure EOTs facilitate genuine employee ownership.
Employee ownership offers benefits beyond tax savings such as improved employee engagement, retention and productivity.
Owners considering a sale to an EOT will need to give greater attention now to cash-flow given that the proceeds are usually paid over a period of time, but the tax bill will be payable by 31 January following the year of sale unless an instalment plan is agreed with HMRC.
Carried Interest
From 6 April 2026, carried interest will become subject to Income Tax. As a transitional provision, a CGT rate of 32% (regardless of other income) applies from 6 April 2025.
Businesses who have seen their investment managers enjoy low CGT rates should review their structures and consider the impact of these changes.
Main Residence Relief
The gain on a person’s only or main residence is generally exempt from CGT.
Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people buy a place in the country, either to let or to escape to at weekends.
If you have more than one private residence, your ‘main’ residence will normally be, by default, the one in which you spend the greatest time. However, it is also possible to nominate one property as your main residence. This requires careful planning since the flip side of a gain on one residence being treated as exempt is that a gain on the other residence will become chargeable.
Written nominations must be submitted to HMRC within 24 months of any change in residences becoming available.
Lettings relief (capped at £40,000 per person, or £80,000 per couple) is now very limited and is generally only available where the owner shares occupation of the property with the occupier. Main residence relief can be restricted where part of a property is used exclusively for letting or business purposes.
The final 9 months of ownership of a former main residence are exempt from CGT, irrespective of how the property is used during that time.
Marital Breakdown
Separated spouses may transfer assets up to three years after the end of the tax year in which they separate, without incurring a CGT liability, e.g. if separated in the tax year ended 5 April 2026, assets could be transferred on or before 5 April 2029, or without time limit if the assets are transferred as part of a formal divorce agreement.
This recent change gives greater flexibility to separating couples and reduces the need to make quick decisions on assets to avoid triggering a tax charge.
Bed and Breakfasting
There is a ‘bed and breakfasting’ rule, under which a gain or loss is not realised for tax purposes if you sell shares and repurchase the same shares within 30 days.
However, there are similar strategies that can still help. A person can sell their shares and have their spouse or civil partner buy the same or similar shareholding at the same time or shortly afterwards. Perhaps to make use of the CGT annual exemption.
It may also be possible to arrange to sell shares to a spouse or civil partner after their spouse or civil partner has transferred some loss-making shares to them, to reduce the overall gain.
Another strategy might be to sell shares and then repurchase the same shares through an ISA or SIPP so that future gains are CGT free.
Realise and Use Capital Losses
Capital losses are automatically offset against capital gains in the same year. Unused losses are carried forward indefinitely and can then be offset against future gains.
A formal claim is required. The claim must be submitted to HMRC within four years of the end of the tax year of the loss, otherwise, it will be time-barred. Hence, claims must be made by 5 April 2026 in respect of 2021/22 losses if claims have not already been filed.
When an asset has become valueless or worth next to nothing, it may be possible to make a “negligible value claim” to realise a capital loss. The claim can be related back up to two tax years in certain circumstances, allowing the loss to be offset against gains made in earlier years.
In some cases, capital losses from disposals can be used against other income to help save Income Tax which is generally at higher rates than CGT.
Gifting Assets
A gift of assets will generally be treated as a disposal for CGT purposes. Whilst there may not be any actual disposal proceeds, when calculating CGT the disposal proceeds can be deemed to be equal to market value at the date of transfer. This can create the potential for a “dry” tax charge, i.e. a tax bill can arise even though the donor has not realised any funds from the transfer.
There is relief available for gifts of business assets to individuals, provided certain conditions are met, which can operate to ensure no tax arises on the transfer and that the recipient picks up any capital gain to the date of transfer. This requires a joint election to be made between transferor and transferee. The relief can be restricted in certain circumstances. For other gifts, relief may be available where they are immediately chargeable to Inheritance Tax (IHT).
IHT should always be considered before making gifts. Further advice should therefore be sought before transferring assets to ensure that CGT and IHT have been considered, along with other applicable taxes.
There are also potential non-tax issues to consider before transferring shares, for example. whilst it may be possible and tax efficient in some situations to transfer shares in a trading company to children, it should be appreciated that the parent would lose all control and rights over those shares (and that the child would have these rights instead) unless further planning was undertaken.
To find out more on the implications of IHT and gifting, please visit:
Key Year-End Steps for 2025/26
As the 2025/36 tax year-end approaches, take a moment to consider the following CGT actions:
Review whether it is possible to realise gains before 6 April 2026 to utilise exemptions and lower rates.
Consider realising assets standing at a loss, if expecting to realise other gains before the end of the tax year.
Assess whether it is beneficial to transfer assets, either as part of bed and breakfasting or a wider strategy, before the year end.
Against a backdrop of higher CGT rates and the forthcoming reduction in the value of BADR after 5 April 2026, early and proactive planning is increasingly important. Regular review of asset ownership, available exemptions and reliefs, and the timing and structure of disposals can be critical in managing CGT, and other tax exposures, and ensuring gains are realised as tax-efficiently as possible.
Steven Tebbutt
Partner at MHA