How capital gains tax works

Capital gains tax is the tax on the profit when you sell an asset that has risen in value, such as a second home or shares held outside an ISA. The first £3,000 of gains each year is tax-free. Above that, gains sit on top of your income and are taxed at 18% or 24% in 2026/27, depending on which band they fall into.

What capital gains tax is, and who pays it

A capital gain is the profit you make when you sell, or give away, an asset that has gone up in value. Capital gains tax is the tax on that profit, not on the full amount you receive. It applies to things like a second home or buy-to-let, shares and funds held outside a tax wrapper, and other valuable possessions and business assets.

Some things are free of CGT: the home you live in (under Private Residence Relief), anything held in a stocks and shares ISA or a pension, and gifts to your spouse or civil partner. So CGT mostly bites on second properties and on investments held in an ordinary dealing account.

The buyer does not deduct the tax for you. You work out the gain, report it and pay it yourself, either within 60 days for UK residential property or through Self Assessment for other assets.

The £3,000 allowance (annual exempt amount)

Everyone gets an annual exempt amount, often just called the capital gains tax allowance: a slice of gains taxed at 0% each year. For 2026/27 it is £3,000. So the first £3,000 of total gains in the tax year costs you nothing, and you only pay tax on the gain above it. The exemption cannot be carried forward, so an unused part is lost at the end of the tax year.

Unlike the dividend allowance, the annual exempt amount does not use up tax-band space. It simply reduces the taxable gain before the rate is worked out.

How gains stack on top of your income

Capital gains are treated as the top slice of your income. Your other income, salary, pension, rental profit and so on, is worked out first: it uses your personal allowance and fills the income tax bands from the bottom. The taxable gain then starts where that income finished and stacks on top.

This is why the same gain can cost two people different amounts. If your income leaves room in the basic-rate band, that part of the gain is taxed at 18%. If your income already reaches into the higher-rate band, the gain starts there and is taxed at 24%. It is your total income, not the gain on its own, that sets the rate.

Capital gains tax rates for 2026/27

Once you are past the £3,000 exemption, the rate depends on which band each slice of the gain lands in. The basic-rate band runs to £37,700 of taxable income (income above the £12,570 personal allowance).

• 18% on the part of the gain that falls within the basic-rate band.
• 24% on the part above it.

For 2026/27 these rates are the same for residential property and for other assets such as shares. Gains on other assets used to be taxed at 10% and 20%, but rose to match the property rates from 30 October 2024. There is no additional rate for gains, so higher and additional-rate taxpayers both pay 24%.

A worked example

Say you sell a buy-to-let for a £20,000 gain, and you have £30,000 of other income. Your £12,570 personal allowance is used by the income, leaving £17,430 of taxable income inside the basic-rate band. That leaves about £20,270 of the basic-rate band free. The gain then stacks on top:

• The first £3,000 is covered by the annual exempt amount, taxed at 0%.
• The remaining £17,000 fits inside the basic-rate band, taxed at 18%, which is £3,060.

So the capital gains tax here is £3,060. To run your own figures, with a different gain or income, use the capital gains tax calculator and it splits the gain across the bands for you.

How to pay less capital gains tax, legitimately

You cannot avoid tax on a genuine taxable gain, but there are legitimate ways to reduce the bill:

• Use your exemption every year. The £3,000 is per person, per year, and cannot be carried forward.
• Own jointly. A couple who own an asset together each get their own £3,000 exemption and use their own bands.
• Use ISAs and pensions. Shares and funds held inside a stocks and shares ISA or a pension are free of CGT. Moving holdings in is sometimes called “bed and ISA”.
• Deduct every allowable cost. Buying and selling fees, and capital improvements to a property, all reduce the gain.
• Offset losses. Losses on other assets in the same year, or carried forward, reduce your gains.
• Time the sale. Selling across two tax years can use two years’ exemptions.

These depend on your circumstances, so check them with an accountant rather than treating them as a rule of thumb.

Capital gains tax on property

The home you live in is normally free of CGT under Private Residence Relief, so capital gains tax on property mostly applies to second homes and buy-to-let. You pay stamp duty when you buy a second property, then capital gains tax on the profit when you sell it. After the £3,000 exemption, the taxable gain is taxed at 18% within your remaining basic-rate band and 24% above it. UK residential property is also the one case where you have to report and pay within 60 days of completion, rather than waiting for Self Assessment.

Capital gains tax on shares

Shares and funds held in a stocks and shares ISA or a pension are free of CGT, so capital gains tax on shares applies to holdings in an ordinary dealing account. The rates match property: nothing on the first £3,000 of gains in 2026/27, then 18% within your basic-rate band and 24% above it. You report share gains through Self Assessment after the tax year ends, and you can offset losses on other holdings against them.

Reporting and paying

How and when you pay depends on what you sold. For UK residential property you must report the gain and pay within 60 days of completion, using HMRC’s Capital Gains Tax on UK property account. For shares and other assets, you report through Self Assessment after the tax year ends. If you run a company and are weighing how to take profits, it is worth seeing how dividend tax compares, since dividends and capital gains are taxed in quite different ways.

Common questions

What is the threshold for capital gains tax in the UK?

The annual exempt amount for 2026/27 is £3,000. You can make £3,000 of gains in the tax year tax-free, and only pay capital gains tax on gains above that.

How much is capital gains tax in the UK?

There is no tax on the first £3,000 of gains in 2026/27. Above that, you pay 18% on the part of the gain that falls within your remaining basic-rate band and 24% on anything above it. The same rates apply to residential property and to other assets such as shares.

What is the formula for calculating capital gains?

Gain = sale proceeds − purchase cost − allowable costs. Allowable costs include buying and selling fees (legal, estate agent, stamp duty paid on purchase) and, for property, money spent improving it. Subtract the £3,000 annual exempt amount from the gain, then tax the rest at 18% or 24%.

How do I avoid capital gains tax on a property sale in the UK?

You cannot avoid it on a taxable gain, but you can reduce it legitimately: claim Private Residence Relief if it was your main home, own jointly so both partners use their £3,000 exemption, deduct every allowable cost and improvement, and offset losses from other assets in the same year. Spreading a sale across two tax years uses two annual exemptions.

How do I avoid capital gains tax on shares?

Hold shares and funds inside a stocks and shares ISA or a pension, where gains are free of CGT. "Bed and ISA" moves existing holdings into an ISA. You can also use your £3,000 exemption each year, transfer assets to a spouse to use theirs, and offset losses. Gifts to a spouse or civil partner do not trigger CGT.

What is the 6-year rule on capital gains tax?

It is a Private Residence Relief point: some periods you were not living in a former main home can still qualify for relief, such as time spent working away. The UK rules are specific (the final 9 months of ownership are normally covered automatically), so check gov.uk Private Residence Relief guidance or an accountant for your case.

Do I pay capital gains tax when I sell my home?

Usually not. The home you live in is normally covered by Private Residence Relief, so selling it is free of capital gains tax. CGT mainly applies to second homes, buy-to-let property, and shares or funds held outside an ISA or pension.

How do I report and pay capital gains tax?

For UK residential property you must report the gain and pay within 60 days of completion, through HMRC's Capital Gains Tax on UK property account. For shares and other assets, you report through Self Assessment after the tax year ends. There is also a real-time service for reporting some disposals sooner.

Are these capital gains figures exact?

They are an estimate to help you plan, not financial or tax advice. The £3,000 exemption and the 18% and 24% rates are correct for 2026/27, but your actual bill depends on your income, your costs and any reliefs. Confirm your position with HMRC or a qualified accountant.

About this article

Written by the calcd team. We build UK money calculators and explain the numbers behind them in plain English. We checked the £3,000 annual exempt amount, the 18% and 24% rates and the top-slice method against gov.uk and HMRC guidance for the 2026/27 tax year. The figures here are an estimate to help you plan, not financial or tax advice. Your actual bill depends on your income, your costs and any reliefs, so confirm it with HMRC or a qualified accountant. Last updated June 2026.