Understanding Capital Gains Tax in 2025

Capital Gains Tax (CGT) applies to gains made on the disposal of a chargeable asset. There are exemptions and reliefs available for CGT and this article provides a comprehensive overview of those and other strategies.

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. 

Annual exemption

The CGT annual exemption for 2024/25 is £3,000 per person. Gains within this amount do not incur CGT. The exemption is expected to remain at the same level for the 2025/26 tax year. This exemption is separate from and 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 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 that gains and losses do not arise on such transfers, and the recipient effectively assumes the donor spouse’s base cost. This means that spouses can plan to maximise the benefit of both annual exemptions.

It is recommended to use this year’s £3,000 exemption by realising gains prior to 6 April 2025 where possible.

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 less than £37,700, CGT was previously taxed at a rate of 10% but is now taxed at 18%. Excess gains have moved from being taxed at 18% to 24%.

In some cases, Business Asset Disposal Relief (BADR) may apply to limit CGT on gains of up to £1m. The amount of relief given through BADR is reducing from 6 April 2025. We will explain more about BADR later in this article.

In some cases, capital losses from disposals can be used against other incomes to help save Income Tax which is generally at higher rates than CGT.

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. The position for residential property has improved a little since the 2023/24 tax year where it was subject to tax at 18% for basic rate taxpayers and 28% for other taxpayers.

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.

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 has been reduced to £1m from 30 October 2024.

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, an individual’s gains on the disposal to an EOT continue to qualify for an effective 0% CGT rate on an unlimited amount of gains, despite the changes in CGT rates and limits mentioned above.

The conditions for EOTs have been 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.

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) will apply 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 just 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 determine that matter by nominating 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 of up to £40,000 (£80,000 per couple) is available for those landlords who are in shared occupancy with more than one tenant or lodger. Housing a single lodger should not impact availability of full CGT relief on your main residence, however, if there are two or more then full relief may not apply as this may be deemed to be a lodging business. In such cases, lettings relief may cover all or part of the gain not covered by the main residence relief.

The final 9 months of ownership of a former main residence are exempt from CGT, irrespective of how you use the property during that time.

Where more than one home is owned, a principal private residence election should be considered.

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 current tax year ended 5 April 2025, assets could be transferred on or before 5 April 2028, 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

Note that there is a ‘bed and breakfasting’ rule, under which a gain or loss does is not realised for tax purposes if you sell shares and repurchase the same shares within 30 days.

The ‘bed and breakfasting‘ rule is where an individual sells shares and then buys the same shares back shortly afterwards to realise a gain or a loss.

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 2025 in respect of 2020/21 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.