Capital Gains Tax sounds like something only the wealthy worry about, but as allowances have shrunk it increasingly catches ordinary investors and second-home owners. Understanding the basics helps you keep more of any profit you make.
What it is
Capital Gains Tax, or CGT, is a tax on the profit you make when you sell something for more than you paid. It applies to gains, not to the whole sale price — so if you bought shares for £5,000 and sold for £8,000, the potential tax is on the £3,000 gain, not the £8,000.
What is exempt
- Your main home is normally free of CGT.
- Anything inside an ISA or pension is exempt — another reason to use those wrappers.
- Personal possessions below a value limit, and gifts between spouses or civil partners.
The shrinking allowance
Everyone has a tax-free annual exempt amount, and only gains above it are taxed. That allowance has been cut sharply in recent years, so gains that once fell comfortably within it now attract tax. The rate you pay depends on whether you are a basic or higher-rate taxpayer, and on what you sold.
Keeping the bill down
- Use your annual allowance each year rather than letting gains build into one big taxable lump.
- Spread disposals across two tax years to use two allowances.
- Move investments into an ISA over time, sometimes called Bed and ISA, to shelter future growth.
- Transfer assets to a spouse to use both allowances, as transfers between you are tax free.
The takeaway
CGT is no longer just a rich person's problem. A little planning around the annual allowance and tax wrappers keeps most ordinary investors well clear of it.