What Capital Gains Tax is
In brief: When you sell investments held in a GIA at a profit, you may owe Capital Gains Tax on the gain above your £3,000 annual allowance. The rate you pay depends on your total income for the year.
Capital Gains Tax (CGT) is charged on the profit you make when you sell or dispose of an asset that has increased in value. The tax is calculated on the gain — the difference between what you paid and what you received — not on the total proceeds.
CGT applies to investment assets held outside tax-sheltered wrappers such as ISAs and pensions. If you hold shares, funds, or other investments in a General Investment Account (GIA), any gain realised on sale may be subject to CGT.
The annual CGT allowance
Each person has an annual CGT allowance — a tax-free threshold below which gains are not taxed. The current allowance is £3,000 per tax year (reduced from £12,300 in 2022/23 and £6,000 in 2023/24).
Gains within the allowance are completely tax-free. Gains above the allowance are taxed at the applicable rate. The allowance cannot be carried forward to future years if unused.
CGT rates on investments
CGT rates on shares and investment funds (non-residential property) currently stand at:
- 18% for basic rate taxpayers
- 24% for higher and additional rate taxpayers
Your CGT rate depends on your total income for the year. If your income alone fills the basic rate band (income above £12,570), all your gains are taxed at 24%. If some of your income falls in the basic rate band, gains that fall within the remaining basic rate capacity are taxed at 18%, and gains above are taxed at 24%.
This means income and gains must be considered together when assessing the tax impact of a disposal.
How CGT interacts with your income
The interaction works as follows:
- Total your taxable income for the year (pension income, employment, rental, interest).
- Determine how much basic rate band remains (the band runs from £12,571 to £50,270).
- Gains that fall within the remaining basic rate band are taxed at 18%.
- Gains above this are taxed at 24%.
For example, if your pension income is £40,000, you have £10,270 of basic rate band remaining. A gain of £15,000 (after the £3,000 allowance) would be taxed £10,270 at 18% and £4,730 at 24%.
Capital losses
If you sell an asset at a loss, that loss can be used to offset gains in the same tax year. Any unused losses can be carried forward to future years indefinitely, reducing future CGT liabilities.
Losses must be reported to HMRC to be recognised — they do not apply automatically.
Partial disposals and the gain ratio
When you sell part of a holding rather than all of it, the gain is proportional. For example, if you sell 25% of a holding where the total unrealised gain represents 50% of the original cost, the realised gain on that sale is approximately 12.5% of the original purchase value.
Retirement projection tools track a cost basis ratio for GIA assets to model this proportional approach.
Bed & ISA: sheltering future growth
Bed & ISA is a technique where you sell GIA investments and immediately repurchase the same investments inside an ISA. This moves holdings from a taxable environment into a tax-free wrapper.
The approach uses the CGT annual allowance: by selling up to the allowance each year (£3,000), gains can be realised without triggering a tax liability. The proceeds are then used to purchase the same investments inside an ISA, where future growth is tax-free.
Over time, this can significantly reduce CGT exposure. The constraint is the annual ISA contribution limit (£20,000 per person), which caps how much can be moved in any single tax year.
Bed & ISA is an opt-in feature in retirement projection tools — disabled by default.
How CGT is modelled in projections
Year-by-year projections calculate CGT by applying the annual allowance and stacking gains on top of income to determine the applicable rate. CGT is treated as accruing in the year of the disposal and paid in the following year (matching the UK self-assessment pattern).
These projections are for modelling purposes only. They do not constitute financial advice. Tax rules are subject to change. Please consult a qualified financial adviser before making financial decisions.