What Is Capital Gains Tax in the UK?

Capital gains tax is an expense all UK investors have to deal with when not using a tax-efficient account. We’ll explain how it works.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

A commonly forgotten expense of investing is taxes. And for UK investors not using a Stocks and Shares ISA, understanding what capital gains tax is and how it works is critical. These costs can sometimes get a bit complicated, so let’s break it down to basics.

What are capital gains?

A capital gain is any profit an investor makes based on the increase in value of their investments. In the case of stocks, this refers to a rise in share price. One thing to note is that capital gains do not apply to any dividends received. Dividends have their own set of tax rules.

Let’s look at an example. An investor has just purchased £1,000 worth of shares at 100p each. This proved to be a good investment because a year later, the shares are now worth 135p – a 35% gain. This investor decides to take their profits and now has £1,350 in their trading account.

The £350 is the capital gain and is subject to capital gains taxes.

What is capital gains tax?

Capital gains tax is the tax an investor has to pay when they sell shares that have increased in value. However, it also applies to other types of assets outside of the stock market.

Some common examples include:

  • bonds (excluding government gilts and qualifying corporate bonds)
  • residential property
  • cryptocurrencies
  • cars
  • jewellery

It’s also worth noting that capital gains tax doesn’t apply to just sold assets. It also affects gifts, transfers to another person, asset swapping, and insurance compensation.

What is the capital gains tax rate in the UK?

There are two classes of capital gains tax rates in the UK.

  • Basic rate: applies to any individual earning less than or equal to £50,270 in annual income
  • Higher rate: applies to any individual earning more than £50,270 in annual income

Depending on the asset that’s being disposed of, each class charges a different rate.

Type of assetBasic CGT rateHigher CGT rate
Stocks and shares10%20%
Residential property18%28%

What is the annual capital gains tax allowance?

Fortunately, the UK government provides individuals with tax relief through the capital gains tax allowance. Any gains made below the CGT allowance threshold are not subject to taxes. 

In the 2022/23 tax year, the capital gains tax allowance stands at £12,300. In other words, if a UK investor sells some of their shares and the total gains are less than £12,300, none of their profits is subject to capital gains tax.

However, in 2022, Chancellor Jeremy Hunt announced planned cuts to the capital gains tax allowance.1 As such, in the 2023/24 tax year, the taxable threshold will be reduced to £6,000. And in the 2024/25 tax year, this threshold will be lowered even further to £3,000.

How is capital gains tax calculated?

As highlighted above, capital gains tax only applies to an investor’s total gain above and beyond the capital gains tax allowance threshold. So, let’s look at a basic example.

An investor earning £48,000 in annual income has built up an investment portfolio worth £450,000. A year later, thanks to some savvy investing decisions, their portfolio is worth £480,000. And they decide to sell some shares and take the £30,000 profit to help pay for a new car. How much capital gains tax do they need to pay?

To keep things simple, let’s assume they haven’t sold any losing positions to offset gains, and all their investments were made at the same time.

The first step is to eliminate the CGT allowance. At £12,300, this reduces the taxable gain to £17,700. Then the appropriate tax rate needs to be applied. The investor is earning less than £50,270 in annual income, so the basic capital gains tax rate of 10% applies. 10% of £17,700 is £1,770; therefore, the investor needs to pay £1,770 in capital gains tax.

Note that as of April 2023, this tax will increase to £2,400 due to the capital gains tax allowance cut. And in April 2024, the CGT liability will jump even higher to £2,700. All the more reason to use clever strategies to avoid paying capital gains tax, such as investing with a tax-efficient account like a Stocks and Shares ISA.

When do you pay capital gains tax?

The time to pay capital gains tax depends on the type of asset being sold. In the case of stocks, all capital gains need to be paid by 31 January after the end of the current tax year.

From the example above, the investor has £1,770 worth of capital gains tax to pay from selling shares between April 2022 and April 2023. In that case, this bill must be paid before 31 January 2024. 

However, the rules are different when it comes to UK residential property. Any capital gains must be reported and paid within 60 days of the sale using the HMRC online tax portal.

How to report capital gains on your tax return  

Capital gains tax on profits from selling stocks and shares must be reported on a Self-Assessment Tax Return. Using HMRC’s online portal, this tax form can be filled out using the step-by-step guide provided. 

After calculating the amount of capital gains tax owed from stock sales throughout the year, this value will need to be inputted into the appropriate box. Investors also need to include additional details such as:

  • The price paid and the price sold for the shares
  • The date when the shares were purchased and sold
  • The trading costs when buying and selling the shares

Frequently Asked Questions

The basic UK capital gains tax rate for stocks is 10%. Investors earning more than £50,270 in annual income have to pay the higher rate of 20%. The basic and higher rates for UK residential property are 18% and 28%, respectively. Capital gains taxes are only paid on gains that exceed the CGT allowance.

Tax policy varies from country to country. The list of countries that have no capital gains tax includes:

  • Bahrain
  • Barbados
  • Belgium
  • Belize
  • Cayman Islands
  • Czech Republic
  • Hong Kong
  • Isle of Man
  • Jamaica
  • Luxembourg
  • Monaco
  • New Zealand
  • Slovakia
  • Slovenia
  • Singapore
  • Sri Lanka
  • Switzerland
  • Turkey

Yes. Similar to the UK, the capital gains tax rate is based on the level of personal income. However, income thresholds vary if taxes are filed jointly or separately. The US capital gains tax rate varies between 0% and 20% for any stocks and shares held for longer than a year. Any gains from investments bought and sold within less than a year are taxed as regular income.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

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This article contains general educational content only and does not take into account your personal financial situation. Before investing, your individual circumstances should be considered, and you may need to seek independent financial advice.  

To the best of our knowledge, all information in this article is accurate as of time of posting. In our educational articles, a "top share" is always defined by the largest market cap at the time of last update. On this page, neither the author nor The Motley Fool have chosen a "top share" by personal opinion.

As always, remember that when investing, the value of your investment may rise or fall, and your capital is at risk.