This two-part article is relevant to those of you who are taking TX-UK in an exam in the period 1 June 2026 to 31 March 2027 and in June 2027, and is based on tax legislation as it applies to the tax year 2025-26 (Finance Act 2025).
Scope of capital gains tax (CGT)
CGT is charged when there is a chargeable disposal of a chargeable asset by a chargeable person.
A chargeable disposal includes part disposals and the gift of assets. However, the transfer of an asset upon death is an exempt disposal. A person who inherits an asset will take it over at its value at the time of death.
Example 1On 19 May 2011, Jorge purchased a hectare of land for £20,200. He died on 20 June 2025, and the land was inherited by his son William. On that date, the land was valued at £71,600.
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All forms of property are chargeable assets unless exempt. The most important exempt assets as far as TX-UK is concerned are:
- Certain chattels (see later)
- Cars
- UK Government securities (gilts)
In determining whether or not an individual is chargeable to CGT, it is necessary to consider their residence status.
Example 2Explain when a person will be treated as resident in the UK for a particular tax year, and state how a person’s residence status establishes whether or not they are liable to CGT. Subject to not meeting any of the automatic non–resident tests, the following people will be treated as resident:
A person can also be treated as resident if they have more UK ties than is permitted according to the number of days they are in the UK during a tax year. A person is liable to CGT on the disposal of assets during any tax year in which they are resident in the UK. |
Basic computation
For individuals, the basic CGT computation is quite straightforward.
Example 3Andy sold a factory on 15 February 2026 for £320,000. The factory was purchased on 24 January 2007 for £164,000, and was extended at a cost of £37,000 during March 2017. During May 2019, the roof of the factory was replaced at a cost of £24,000 following a fire. Andy incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £5,400 in connection with the disposal. Andy’s taxable gain for 2025-26 is:
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Capital losses
Capital losses are set off against any chargeable gains arising in the same tax year before deducting the annual exempt amount. This order of set off can lead to capital losses being wasted if gains would otherwise have been covered by the annual exempt amount.
Any unrelieved capital losses are carried forward, but in future years they are set off against any chargeable gains after deducting the annual exempt amount. This means that brought forward capital losses are never wasted in the same manner as current year capital losses.
Example 4For the tax year 2025-26, Nim has chargeable gains of £18,300 and capital losses of £16,300. Nim’s taxable gains for 2025-26 are:
There are no capital losses to carry forward. Nim has effectively wasted £1,000 (3,000 – 2,000) of capital losses. If the capital losses of £16,300 had instead been brought forward from the tax year 2024-25, Nim’s taxable gains for 2025-26 would have been:
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Rates of capital gains tax
The rate of CGT is linked to the level of a person’s taxable income. Taxable gains are taxed at a lower rate of 18% where they fall within the basic rate tax band of £37,700, and at a higher rate of 24% where they exceed this threshold.
Remember that the basic rate tax band is extended if a person pays personal pension contributions or makes a gift aid donation.
Payments on account for disposals of residential property
A payment on account must be made within 60 days of the date of disposal (completion date), where CGT is payable in respect of a disposal of residential property. A return must be submitted to HM Revenue and Customs (HMRC) at the same time.
CGT will be payable if a gain arising on the disposal of residential property is not fully covered by the private residence exemption (see later in this article).
The calculation of the payment on account takes into account the annual exempt amount, any capital losses incurred in the same tax year prior to the disposal of the residential property, plus any brought forward capital losses. Any other chargeable gains and capital losses incurred subsequent to the disposal of the residential property are ignored.
It is necessary to make an estimate as to how much of the taxpayer’s basic rate tax band will be available for the tax year.
Example 5Zack, a higher rate taxpayer, had the following chargeable gains and capital losses during the tax year 2025-26:
A payment on account of CGT will have been made on 30 October 2025 in respect of the residential property disposal on 31 August 2025, calculated as:
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Self-assessment
CGT is otherwise collected as part of the self-assessment system, and is due in one amount on 31 January following the tax year. Therefore, a CGT liability for the tax year 2025-26 will be payable on 31 January 2027.
Self-assessment payments on account are not required in respect of CGT.
A residential property gain is still included in the self-assessment computation, with the payment on account deducted from the total CGT liability.
Example 6For the tax year 2025-26, Adam has a salary of £44,000. During the year, he made net personal pension contributions of £4,400. On 15 June 2025, Adam sold an antique table and this resulted in a chargeable gain of £12,500. For the tax year 2025-26, Bee has a trading profit of £60,000. On 20 August 2025, she sold an antique vase and this resulted in a chargeable gain of £10,800. For the tax year 2025-26, Chester has a salary of £43,500. On 31 October 2025, he sold a residential property and this resulted in a chargeable gain of £38,000. Adam Adam’s taxable gain of £9,500 (12,500 less the annual exempt amount of 3,000) is fully within the unused basic rate tax band, so his CGT liability for 2025-26 is therefore £1,710 (9,500 at 18%). This will be due on 31 January 2027. Bee Chester
Chester’s CGT liability of £7,994 will have been paid 60 days after the disposal (30 December 2025). Assuming his income for the tax year 2025-26 was correctly estimated at the time of the residential property disposal, no adjustment will be necessary under the self-assessment system. |
Although a payment on account is required in respect of a residential property gain, additional CGT may be payable on 31 January following the tax year. If a repayment is due, this will be claimed when the self-assessment tax return for the tax year is submitted.
Example 7Continuing with example 5, Zack will have to pay the following additional CGT on 31 January 2027:
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Business asset disposal relief
A reduced CGT rate of 14% applies if a disposal qualifies for business asset disposal relief. This rate applies regardless of the level of a person’s taxable income. Business asset disposal relief can be claimed when an individual disposes of a business or a part of a business as follows:
- A disposal of the whole or part of a business run as a sole trader. Relief is only available in respect of chargeable gains arising from the disposal of assets in use for the purpose of the business. This will exclude chargeable gains arising from investments.
- The disposal of shares in a trading company where a 5% shareholding condition is satisfied and the individual is also an officer or an employee of the company. Provided the limited company is a trading company, there is no restriction to the amount of relief if it holds non-trading assets such as investments.
The relief covers the first £1 million of qualifying gains which a person makes during their lifetime. Gains in excess of the £1 million limit are taxed as normal at the 18% or 24% rates.
The qualifying conditions must be met for a period of two years prior to the date of disposal in order for business asset disposal relief to be available.
Example 8On 15 October 2025, the four shareholders of Alphabet Ltd, an unquoted trading company, all sold their shares in the company. Alphabet Ltd has a share capital of 100,000 £1 ordinary shares. Aloi had been the managing director of Alphabet Ltd since the company’s incorporation on 1 January 2015. She had held 60,000 shares since 1 January 2015. Bon had been the sales director of Alphabet Ltd since 1 February 2024, having not previously been an employee of the company. She had held 25,000 shares since 1 February 2024. Cherry had never been an employee or a director of Alphabet Ltd. She had held 12,000 shares since 27 July 2018. Dee had been an employee of Alphabet Ltd since 1 May 2016. She had held 3,000 shares since 20 June 2017.
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Example 9On 25 January 2026, Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2019, and was an employee of the company from that date until the date of disposal. He has taxable income of £8,000 for the tax year 2025-26. Michael’s CGT liability for 2025-26 is:
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Although chargeable gains which qualify for business asset disposal relief are always taxed at a rate of 14%, they must be taken into account when establishing which rate applies to other chargeable gains. Chargeable gains qualifying for business asset disposal relief therefore reduce the amount of any unused basic rate tax band.
The annual exempt amount and any capital losses should be initially deducted from those chargeable gains which do not qualify for business asset disposal relief. This approach will save CGT at 18% or 24%, compared to just 14% if used against chargeable gains which do qualify for relief.
There are several ways of presenting computations involving such a mix of gains, but the simplest approach is to keep gains qualifying for business asset disposal relief and other gains separate.
Example 10On 30 September 2025, Mika sold a business which she had run as a sole trader since 1 January 2019. The disposal resulted in the following chargeable gains:
The assets were all owned for more than two years prior to the date of disposal. The warehouse had never been used by Mika for business purposes. Mika has taxable income of £8,000 for the tax year 2025-26. She has unused capital losses of £31,000 brought forward from the tax year 2024-25. Mika’s CGT liability for 2025-26 is:
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Where the £1 million lifetime limit is exceeded, gains in excess of the limit will be subject to the normal rates of capital gains tax.
Example 11On 10 December 2025, Raj sold a 45% shareholding in Splash Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £1,300,000 which qualifies for business asset disposal relief. Raj is a higher rate taxpayer and has not made any previous disposals qualifying for relief. Raj’s CGT liability is:
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Married couples
Transfers between spouses (and between partners in a registered civil partnership) do not give rise to any chargeable gain or capital loss. This does not mean that the disposal is exempt from CGT; it means that there is no charge at the time of the transfer as the transferee takes over the original cost of the asset.
Example 12Bill and Cathy are a married couple. They disposed of the following assets during the tax year 2025-26:
Bill and Cathy each have taxable income of £60,000 for the tax year 2025-26. Jointly owned property
The transfer of the 20,000 £1 ordinary shares in Elf plc to Cathy does not give rise to any chargeable gain or capital loss, because it is a transfer between spouses.
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It may be the case that one spouse has not utilised their annual exempt amount and/or basic rate tax band for a particular tax year. It could therefore be beneficial to transfer an asset to that spouse before its disposal, or to put an asset into joint names prior to disposal.
Example 13For the tax year 2025-26, Jane is a higher rate taxpayer but her husband Claude does not have any taxable income. During March 2026, Jane is going to dispose of a residential property, and this will result in a chargeable gain of £120,000. If 50% ownership of the property is transferred to Claude prior to its disposal, this will enable his annual exempt amount and basic rate tax band for 2025-26 to be utilised. The CGT saving for the couple will be £2,982:
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Part disposals
When just part of an asset is disposed of, the cost must be apportioned between the part disposed of and the part retained (by reference to the current market value).
Example 14On 16 February 2026, Joan sold three hectares of land for £285,000. She had originally purchased four hectares of land on 17 July 2024 for £220,000. The market value of the unsold hectare of land as at 16 February 2026 was £90,000.
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With part disposals, care must be taken with enhancement expenditure and incidental costs as these could relate to the whole asset or just to the part being disposed of.
Example 15On 20 February 2026, Furgus sold a hectare of land for £130,000. He had originally purchased four hectares of land on 13 April 2014 for £210,000. During January 2026, Furgus spent £22,800 clearing and levelling all four hectares of land. The market value of the unsold three hectares of land as at 20 February 2026 was £350,000. Furgus incurred legal fees of £3,200 in connection with the disposal. Furgus’ chargeable gain for 2025-26 is:
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Chattels
Special rules apply to chattels. A chattel is tangible moveable property.
Wasting chattels (except chattels which are eligible for capital allowances) are exempt from CGT.
Non-wasting chattels (and chattels eligible for capital allowances) are only exempt if they are both bought and sold for less than £6,000.
Example 16On 18 August 2025, Gloria sold an antique table for £5,600 and an antique vase for £7,200. The antique table had been purchased on 27 May 2024 for £3,200 and the antique vase had been purchased on 14 June 2024 for £3,700.
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Where a non-wasting chattel is sold at a loss and the sale proceeds are less than £6,000, the amount of allowable capital loss will be restricted. If capital allowances have been claimed on a chattel, no capital loss will be available at all.
Example 17Giles sold the following assets during the tax year 2025-26: On 3 February 2026, he sold an antique table for £4,700. The table had been purchased on 2 May 2015 for £10,200. On 12 March 2026, he sold machinery for £22,600. The machinery had been purchased on 1 June 2022 for £34,000. Giles claimed capital allowances totalling £11,400 in respect of this machinery. Table
Machinery
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Wasting assets
A wasting asset is one which has a remaining useful life of 50 years or less. The cost of such an asset must be adjusted for the expected depreciation over the life of the asset.
Example 18On 31 March 2026, Mung sold a copyright for £9,600. The copyright had been purchased on 1 April 2021 for £10,000 when it had an unexpired life of 20 years. The chargeable gain on the copyright is:
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Insurance proceeds
If an asset is lost or destroyed, the receipt of insurance proceeds is treated as a normal disposal. However, rollover relief is available if the insurance monies are used to purchase a replacement asset within a period of 12 months.
Example 19On 20 October 2025, an antique table owned by Claude was destroyed in a fire. The table had been purchased on 23 November 2023 for £50,000. Claude received insurance proceeds of £74,000 on 6 December 2025 and on 18 December 2025 he paid £75,400 for a replacement table.
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If the insurance proceeds are not entirely reinvested there will be an immediate chargeable gain.
Example 20Continuing with example 19, assume that the replacement table only cost £71,500.
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If an asset is damaged, the receipt of insurance proceeds is treated as a part disposal. However, if all the proceeds are used to restore the asset, a claim can be made to ignore the part disposal rules.
Example 21On 1 October 2025, an antique carpet owned by Juliet was damaged by a flood. The carpet had been purchased on 17 November 2021 for £69,000. Juliet received insurance proceeds of £12,000 on 12 December 2025 and she spent a total of £13,400 during December 2025 restoring the carpet. Juliet has made a claim to ignore the part disposal rules.
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Private residence relief
A gain on the disposal of a private residence is exempt where the owner has occupied the house throughout the whole period of ownership. The final nine months of ownership are always treated as a period of occupation. The following periods of absence are also deemed to be periods of occupation:
(a) Periods up to a total of three years for any reason.
(b) Any periods where the owner is required to live abroad due to their employment.
(c) Periods up to four years where the owner is required to live elsewhere in the UK due to their work.
These deemed periods of occupation must normally be preceded and followed by actual periods of occupation. However, the condition that the period of absence must be followed by a period of occupation is relaxed in the case of (b) and (c) if the owner is unable to return because they are required to reside elsewhere due to the terms of their employment.
Example 22On 30 September 2025, Hue sold a house for £381,900. The house had been purchased on 1 October 2005 for £141,900. Hue occupied the house as her main residence from the date of purchase until 31 March 2009. The house was then unoccupied between 1 April 2009 and 31 December 2012 due to Hue being required by her employer to work elsewhere in the UK. From 1 January 2013 until 31 December 2019, Hue again occupied the house as her main residence. The house was then unoccupied until it was sold on 30 September 2025. The chargeable gain on the house is:
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Where part of a property is used exclusively for business use, private residence relief will be restricted.
Example 23On 30 September 2025, Mae sold a residential property for £326,000. The property had been purchased on 1 October 2015 for £122,000. Throughout the period of ownership, the property was occupied by Mae as her main residence, but two of the property’s eight rooms (25% of the property) were always used exclusively for business purposes by Mae. The chargeable gain on the property is:
Private residence relief is restricted to £153,000 (204,000 x 75%). |
Letting relief
Letting relief is only available where a property is let out and the property owner is in shared occupancy with the tenant.
There is therefore no relief where the whole property is let out without the owner also being in residence.
Example 24Continuing with example 23, but assume that the two rooms were instead always let out exclusively to tenants. The chargeable gain on the house is:
Letting relief is the lower of:
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The second part of the article will cover shares, reliefs, basic CGT planning and the way in which gains made by limited companies are taxed. It also contains some exam guidance and a test of your understanding.
Written by a member of the TX-UK examining team
