Capital Gains Tax on Investments: What You Need to Know

Purple Flower

Allowances, rates and the rules that catch UK investors out.

What exactly is capital gains tax and when do you pay it?

Capital gains tax (CGT) is charged on the profit you make when you sell an investment for more than you paid for it. If you buy shares worth £5,000 and sell them for £7,000, your capital gain is £2,000. CGT is charged on that £2,000 profit - not on the full £7,000. You only pay CGT when you actually sell; holding an investment that’s increased in value doesn’t trigger any tax, no matter how long you hold it or how much it’s grown.

This timing aspect is important. Many investors forget they’re going to owe CGT when they sell, and are surprised by the bill. Planning when and how you sell can significantly reduce what you owe.

What is the annual exempt amount for capital gains tax?

For the 2025/26 tax year, your CGT annual exemption is £3,000. This means you can make up to £3,000 in capital gains per year completely tax-free. Only gains above that threshold are taxable.

This exemption applies once per person per tax year. You can’t split it across different investments or claim it multiple times. If you sell multiple investments in the same year and make a combined gain of £8,000, your first £3,000 is tax-free and you pay CGT on the remaining £5,000.

The annual exemption is lower than it was several years ago - it’s been progressively reduced - so more investors are now catching CGT obligations when they didn’t used to.

What are the different CGT rates and who pays what?

Capital gains tax is charged at different rates depending on your income tax band. Basic-rate income taxpayers (paying 20% income tax) pay 10% CGT on gains above the exemption. Higher-rate taxpayers (paying 40% income tax) pay 20% CGT on gains. These rates apply to most shares and funds.

There’s an important exception: residential property gains are charged at 8% (basic rate) and 20% (higher rate). But investment property and other assets follow the standard 10%/20% structure.

So if you’re a basic-rate taxpayer with a £5,000 gain and you’ve used your exemption already, you’d owe £500 in CGT (10% of the £5,000). A higher-rate taxpayer on the same gain would owe £1,000 (20%). Neither of these is earth-shattering, but across several years of selling investments, it adds up.

How do you actually calculate your capital gain or loss?

The gain is straightforward: selling price minus cost price equals gain. If you bought shares for £2,000 and sold them for £2,600, your gain is £600. You also deduct any costs related to the purchase and sale - broker fees, stamp duty, or other direct costs.

If you bought at different times and sold in tranches, things get more complex. The "bed and breakfast" rules let you sell shares at a loss and immediately repurchase them to "lock in" the loss for CGT purposes - useful for offsetting other gains. Some investors use this strategically in December to crystallize losses before the tax year ends.

Many investment platforms now calculate your gains automatically when you sell, showing you the tax liability before you confirm the transaction. Use this feature - it prevents nasty surprises.

Can you use ISAs to completely avoid capital gains tax?

Yes - investments held in an ISA wrapper are completely free from CGT. If you buy a share for £1,000 and sell it for £5,000 inside an ISA, that £4,000 gain is entirely tax-free. This is one of the major benefits of ISAs, and it makes them incredibly valuable for active traders or investors making large gains.

A Stocks and Shares ISA has no limit on the gains you can make tax-free. You only have a limit on how much you can invest per year (£20,000), but any growth on that money is completely sheltered from CGT.

This is why many experienced investors use their ISA allowance before investing in taxable accounts. The tax-free growth compounds over time and can save thousands in CGT bills.

What is the "bed and ISA" strategy and how does it work?

Bed and ISA is a technique where you sell shares in a taxable investment account to crystallize a loss or take profits, then immediately buy those same shares inside an ISA wrapper. This is particularly useful if you’ve held shares for years in a regular investment account and now want the future growth to be tax-free.

For example: you own shares worth £8,000 that you bought for £3,000. You’re sitting on a £5,000 gain. You sell them in your regular account, taking a capital gain (liable to CGT at 10-20%), then buy them back immediately inside an ISA. All future growth is now tax-free. If those shares grow to £15,000, that additional £7,000 is protected from CGT.

The key: there’s no "bed and breakfast" rule preventing you from repurchasing inside an ISA immediately - that rule only applies to repurchasing in the same taxable account. This strategy involves some dealing costs but can be very efficient for larger portfolios.

What reporting and record-keeping do you need to do?

You must report any capital gains to HMRC. If you use a tax return, you report them there. If you don’t normally submit a return but you’ve made gains above the exemption, you must tell HMRC by 5 October following the end of the tax year. Failure to report can result in penalties.

Your investment platform should provide you with a statement showing your transactions, cost basis, and gains - usually in a "tax summary" or "annual statement." Keep these records for at least 4 years. Also keep records of any fees or costs you paid related to buying or selling.

If you’ve made a loss, report that too - losses offset gains in the same year, and unused losses can be carried forward to future years.

Where Mona Fits

Mona’s Stocks and Shares ISA wrapper means your investments and all growth are completely protected from capital gains tax. As your portfolio grows, you’re not building up a future tax liability. This simplifies your tax position and means you can focus on long-term growth without worrying about crystallizing gains at the wrong time. It’s one of the cleanest, most tax-efficient ways to invest.

The Bottom Line

Capital gains tax applies when you sell investments at a profit, but your first £3,000 of gains per year is tax-free. Rates are 10% for basic-rate taxpayers and 20% for higher-rate taxpayers on most investments. The smartest move is using your ISA allowance first - any growth inside an ISA is completely free from CGT, eliminating the tax problem entirely. For taxable accounts, track your gains carefully and consider bed and ISA strategies if you’re moving profitable investments into tax-free wrappers. Good record-keeping and strategic timing can save thousands over a lifetime of investing.

Maximize your ISA allowance to shelter growth from capital gains tax. See how Mona can help you invest tax-efficiently.

For impartial information and guidance on capital gains tax, visit MoneyHelper.org.uk.

Join Mona’s early access waitlist

Join the waitlist

All articles

Capital Gains Tax on Investments: What You Need to Know

Purple Flower

Allowances, rates and the rules that catch UK investors out.

What exactly is capital gains tax and when do you pay it?

Capital gains tax (CGT) is charged on the profit you make when you sell an investment for more than you paid for it. If you buy shares worth £5,000 and sell them for £7,000, your capital gain is £2,000. CGT is charged on that £2,000 profit - not on the full £7,000. You only pay CGT when you actually sell; holding an investment that’s increased in value doesn’t trigger any tax, no matter how long you hold it or how much it’s grown.

This timing aspect is important. Many investors forget they’re going to owe CGT when they sell, and are surprised by the bill. Planning when and how you sell can significantly reduce what you owe.

What is the annual exempt amount for capital gains tax?

For the 2025/26 tax year, your CGT annual exemption is £3,000. This means you can make up to £3,000 in capital gains per year completely tax-free. Only gains above that threshold are taxable.

This exemption applies once per person per tax year. You can’t split it across different investments or claim it multiple times. If you sell multiple investments in the same year and make a combined gain of £8,000, your first £3,000 is tax-free and you pay CGT on the remaining £5,000.

The annual exemption is lower than it was several years ago - it’s been progressively reduced - so more investors are now catching CGT obligations when they didn’t used to.

What are the different CGT rates and who pays what?

Capital gains tax is charged at different rates depending on your income tax band. Basic-rate income taxpayers (paying 20% income tax) pay 10% CGT on gains above the exemption. Higher-rate taxpayers (paying 40% income tax) pay 20% CGT on gains. These rates apply to most shares and funds.

There’s an important exception: residential property gains are charged at 8% (basic rate) and 20% (higher rate). But investment property and other assets follow the standard 10%/20% structure.

So if you’re a basic-rate taxpayer with a £5,000 gain and you’ve used your exemption already, you’d owe £500 in CGT (10% of the £5,000). A higher-rate taxpayer on the same gain would owe £1,000 (20%). Neither of these is earth-shattering, but across several years of selling investments, it adds up.

How do you actually calculate your capital gain or loss?

The gain is straightforward: selling price minus cost price equals gain. If you bought shares for £2,000 and sold them for £2,600, your gain is £600. You also deduct any costs related to the purchase and sale - broker fees, stamp duty, or other direct costs.

If you bought at different times and sold in tranches, things get more complex. The "bed and breakfast" rules let you sell shares at a loss and immediately repurchase them to "lock in" the loss for CGT purposes - useful for offsetting other gains. Some investors use this strategically in December to crystallize losses before the tax year ends.

Many investment platforms now calculate your gains automatically when you sell, showing you the tax liability before you confirm the transaction. Use this feature - it prevents nasty surprises.

Can you use ISAs to completely avoid capital gains tax?

Yes - investments held in an ISA wrapper are completely free from CGT. If you buy a share for £1,000 and sell it for £5,000 inside an ISA, that £4,000 gain is entirely tax-free. This is one of the major benefits of ISAs, and it makes them incredibly valuable for active traders or investors making large gains.

A Stocks and Shares ISA has no limit on the gains you can make tax-free. You only have a limit on how much you can invest per year (£20,000), but any growth on that money is completely sheltered from CGT.

This is why many experienced investors use their ISA allowance before investing in taxable accounts. The tax-free growth compounds over time and can save thousands in CGT bills.

What is the "bed and ISA" strategy and how does it work?

Bed and ISA is a technique where you sell shares in a taxable investment account to crystallize a loss or take profits, then immediately buy those same shares inside an ISA wrapper. This is particularly useful if you’ve held shares for years in a regular investment account and now want the future growth to be tax-free.

For example: you own shares worth £8,000 that you bought for £3,000. You’re sitting on a £5,000 gain. You sell them in your regular account, taking a capital gain (liable to CGT at 10-20%), then buy them back immediately inside an ISA. All future growth is now tax-free. If those shares grow to £15,000, that additional £7,000 is protected from CGT.

The key: there’s no "bed and breakfast" rule preventing you from repurchasing inside an ISA immediately - that rule only applies to repurchasing in the same taxable account. This strategy involves some dealing costs but can be very efficient for larger portfolios.

What reporting and record-keeping do you need to do?

You must report any capital gains to HMRC. If you use a tax return, you report them there. If you don’t normally submit a return but you’ve made gains above the exemption, you must tell HMRC by 5 October following the end of the tax year. Failure to report can result in penalties.

Your investment platform should provide you with a statement showing your transactions, cost basis, and gains - usually in a "tax summary" or "annual statement." Keep these records for at least 4 years. Also keep records of any fees or costs you paid related to buying or selling.

If you’ve made a loss, report that too - losses offset gains in the same year, and unused losses can be carried forward to future years.

Where Mona Fits

Mona’s Stocks and Shares ISA wrapper means your investments and all growth are completely protected from capital gains tax. As your portfolio grows, you’re not building up a future tax liability. This simplifies your tax position and means you can focus on long-term growth without worrying about crystallizing gains at the wrong time. It’s one of the cleanest, most tax-efficient ways to invest.

The Bottom Line

Capital gains tax applies when you sell investments at a profit, but your first £3,000 of gains per year is tax-free. Rates are 10% for basic-rate taxpayers and 20% for higher-rate taxpayers on most investments. The smartest move is using your ISA allowance first - any growth inside an ISA is completely free from CGT, eliminating the tax problem entirely. For taxable accounts, track your gains carefully and consider bed and ISA strategies if you’re moving profitable investments into tax-free wrappers. Good record-keeping and strategic timing can save thousands over a lifetime of investing.

Maximize your ISA allowance to shelter growth from capital gains tax. See how Mona can help you invest tax-efficiently.

For impartial information and guidance on capital gains tax, visit MoneyHelper.org.uk.

Join Mona’s early access waitlist

Join the waitlist

All articles