What is Capital Gains Tax? The basics

When you invest, the aim is usually to grow the value of your money over time. When your investments increase in value and you sell or dispose of them, the profit you make is called a capital gain. In some cases, you may need to pay Capital Gains Tax (CGT) on that profit.

CGT doesn’t apply to every investment, and many people won’t pay it at all. If your investments are held in an ISA or pension, any gains are generally free from Capital Gains Tax, and you also have an annual tax-free allowance.

However, if you hold investments outside these accounts, it’s helpful to understand when CGT might apply and what steps you can take to help manage it.

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What is a capital gain?

Broadly speaking, a capital gain is the increase in value of something you own.

You usually only pay Capital Gains Tax when you sell or otherwise dispose of an asset (for example by selling, gifting or, in some cases, switching investments). Gains on investments you still hold are not taxed.

If your investments are held in an ISA or a Self-Invested Personal Pension (SIPP), any gains are not subject to Capital Gains Tax. You also have an annual CGT allowance, although this can change each tax year. Your main home is usually exempt, subject to certain conditions.

If you hold investments outside these accounts and they increase in value, you may need to pay Capital Gains Tax when you dispose of them.

Which assets are subject to CGT?

Capital Gains Tax can apply when you dispose of investments such as stocks and shares, investment funds or investment trusts. Some investments are exempt, including investments held in an ISA.

The tax is charged on the profit you make - not the total amount you receive.

For example, if you bought shares for £10,000 and later sold them for £20,000, your capital gain would be £10,000. After using your annual CGT allowance, part of that gain may be taxable. Please note that this is a simplified example. There are other factors you may need to consider, such as taking account of allowable costs, losses, or reliefs. Where you have bought the same shares or units at different times, special share matching and pooling rules may affect the calculation.

How much CGT might you pay?

The rate of Capital Gains Tax depends on your Income tax band and the type of asset.

For most investments, basic rate taxpayers usually pay a lower rate than higher or additional rate taxpayers. Different rates can apply depending on the type of asset, and tax rules may change over time.

It’s worth checking the latest HMRC guidance before you sell.

How to report your CGT

If your gains exceed your CGT allowance, you may need to report them to HMRC. HMRC won’t usually send you a bill, so you’re responsible for reporting and paying any tax due.

You may also need to report disposals even where no CGT is payable, for example if you are in Self-Assessment and your total disposal proceeds exceed the relevant reporting threshold, or if you want to claim a capital loss. UK residential property and non-resident property disposals have separate reporting rules.

You can report your gain through a Self-Assessment tax return or by using the ‘real time’ Capital Gains Tax service on gov.uk. Deadlines and rules can vary depending on the type of asset, so it’s important to check what applies to your situation.

How can you reduce CGT?

Alongside using your CGT allowance and tax-efficient accounts, there are a few approaches that may help reduce the amount of tax you pay:

• Transfer assets to a spouse or civil partner - these are usually treated as ‘no gain, no loss’ for tax purposes, allowing you to use both allowances and potentially benefit from a lower tax rate
• Offset losses against gains - losses can typically be used to reduce gains in the same year or carried forward. Please note that losses need to be claimed, for example by filing a return with HMRC, otherwise they may be lost. You can find more information here: Capital Gains Tax: what you pay it on, rates and allowances: If you make a loss - GOV.UK
• Plan when you sell - spreading disposals across tax years or selling in a lower-income year may reduce the tax you pay. But share and fund disposals are subject to matching rules. Selling and buying back the same shares or units shortly afterwards may not produce the tax result expected because same-day and 30-day matching rules can apply.

What this means for you

Understanding how Capital Gains Tax works can help you plan ahead and keep more of your returns.

If you’re investing outside of an ISA or pension, it’s worth being aware of how gains are calculated and when tax might apply. Simple steps - like using your allowance, keeping track of losses, or considering tax-efficient accounts - can make a difference over time.

Tax rules can change, and the best approach depends on your individual circumstances. It’s always worth checking the latest HMRC guidance or seeking advice before making decisions.

Read: The tax hacks to help you keep more of your money
Read: The tax benefits of an ISA
Read: The tax benefits of a SIPP

Important information: investors should note that the views expressed may no longer be current and may have already been acted upon Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.