How to calculate Capital gains tax?

Capital gains tax is the tax you may pay when you sell something for more than you paid for it. That could be shares, investments or a second property. It is based on the profit you make, not the full amount you sell it for.

In the 2026 to 2027 tax year, most people can make £3,000 in gains before capital gains tax is due. If your gain is above that, the main rates are 18 per cent and 24 per cent, depending on your income.

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That matters even more now because the annual exempt amount has fallen sharply in a short space of time, moving from £12,300 in 2022/23, to just £3,000 from 2024/25 onwards. As that tax free allowance has narrowed, more people have been brought within the scope of capital gains tax, which makes it increasingly important to stay aware of changing tax rules.

How is capital gains tax calculated?

Capital gains tax is charged on the gain rather than the full sale price. So, if you bought an asset for £200,000 and later sold it for £260,000, your starting gain is £60,000. From there, you can usually deduct certain costs, such as legal fees, estate agency fees and some improvement costs, which reduces the gain before tax is worked out.  

The calculation of the base cost for investments is often not simply the amount you originally invested, as growth can result in the purchase of additional units of investment at a different price. Care needs to be taken, and base cost should be used in the calculation of gain rather than the original investment amount.

Imagine you sell a buy to let property and, after allowable costs, your gain is £40,000. You then deduct the £3,000 annual exempt amount, leaving a taxable gain of £37,000. The tax you pay depends on your income and the asset sold. Residential property now has the same CGT rates as other assets, but for most individuals the current capital gains tax rates are 18 per cent for gains that fall within the basic rate band and 24 per cent for gains above it.

The gain calculation on a second property can be complicated by periods of non-residency, or periods where the property was your Principal Private Residence. These can result in a proportion of the gain being ignored for capital gains tax.

If the asset is a UK residential property and tax is due, there is also a strict deadline. In most cases, you must report and pay the tax within 60 days of completion rather than waiting and reporting it in line with normal self-assessment deadlines. This is one reason people need to calculate the likely bill early.  

Who pays capital gains tax?

Capital gains tax is usually paid by individuals when they sell or give away something that has risen in value and the gain is above their allowance. That can include shares, investments, second homes and buy to let property, and chattels. Not every sale or transfer of ownership leads to tax, but many investors and landlords are within scope.  

Business owners can be affected too, although the rules depend on the structure of the business. A sole trader or partner may pay capital gains tax personally when selling a business asset. A limited company is different, because it does not usually pay capital gains tax itself. Instead, it normally pays corporation tax on any chargeable gains. That is an important distinction for landlords deciding whether to hold property personally or through a company.  

There can also be reliefs for business owners. Business Asset Disposal Relief can reduce the rate on qualifying gains, although the rate is now higher than many people still assume. For disposals in the 2025 to 2026 tax year, the rate was 14 per cent, which rose to 18 per cent from 6 April 2026.  

How to reduce your capital gains tax bill

The first step is to make sure you are claiming everything you are allowed to claim. Many people focus on the sale price and forget that buying and selling costs can usually be deducted, along with certain improvement costs. That alone can reduce the taxable gain by more than expected.  

Losses can also help because if you have made losses on other assets, you may be able to use them to reduce your gains, provided they have been reported properly. With the annual exempt amount now only £3,000, using losses well can make a real difference.  

Married couples and civil partners may also have more planning options, because assets can often be transferred between them without an immediate tax charge. In the right circumstances, that can help a couple make better use of allowances and lower tax bands.  

Capital gains tax can also result from making a gift of an asset even if not sold, as this is a transfer of value. In addition, under current legislation, capital gains are not payable on death, and the assets are rebased in the hands of your beneficiaries. This is an important consideration in estate planning, as the aim of saving 40% Inheritance tax can be diluted by the capital gains tax due which would otherwise not be payable on death. Capital gains tax in life vs on death should therefore be carefully considered when choosing which assets are most suitable to gift.

Capital gains tax rate: Short vs long

In the UK, capital gains tax does not work like some overseas systems where short term and long term gains are taxed at different rates depending on how long you held the asset. Here, the rate is not usually based on the length of ownership. Instead, it depends mainly on your income. Most assets are now taxed at same rates and whether any relief applies.  

That means the key question is how much taxable gain is left after costs, losses and allowances, and which tax band that gain falls into, rather than how long you owned the asset. Instead, the tax rate mainly depends on your income tax band, although certain assets and reliefs can be subject to different rules or rates.

Further capital gains tax support  

The basic formula for capital gains tax is clear enough. Work out the gain, deduct allowable costs, take off losses and your annual allowance, then apply the right rate. The challenge is making sure the right figures go into the calculation and that nothing is missed.  

That is why tailored advice can be valuable, especially for landlords, investors and business owners. When allowances are lower and deadlines are tighter, getting the calculation right first time matters more. If you want clarity on a future sale, or support with a recent one, financial advice can help you understand the likely tax bill and the options available before you make a decision.

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The Financial Conduct Authority (FCA) does not regulate cash flow planning, tax or estate planning.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. 

The information contained in this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change.