If you’ve built a solid investment portfolio, there’s a good chance you’re sitting on some gains. And while watching your investments grow is always welcome, what happens when it’s time to cash in?
Without careful capital gains tax (CGT) planning, CGT can quietly chomp into your returns.
The good news: a few well-timed decisions and an understanding of how gains and income are taxed can make a massive difference.
Let’s walk through the key rules and smart strategies to help you keep more of what you’ve earned.
Short-Term vs Long-Term Capital Gains
Unlike in the US, the UK tax system doesn’t formally split capital gains into “short-term” and “long-term” categories, but the principle still holds: timing matters.
Any profit you make when selling or disposing of an asset (like shares, property or crypto) could be liable to CGT. The tax is calculated based on the gain made, not the total sale value.
Here’s what UK investors need to know:
- The annual CGT allowance has shrunk: For the 2025/26 tax year, individuals can realise just £3,000 in capital gains before paying tax, a steep drop from £12,300 just two years ago.
- Rates vary by asset and income:
- From 30 October 2024, gains are taxed at 18% (basic rate) and 24% (higher/additional rate), for most asset types, including residential property.
- These updated rates apply for the 2025/26 tax year onwards.
- Gains are added to your income: This means that a large gain could tip you into a higher tax bracket, triggering a higher CGT rate on part of your gain.
- Gains are taxed in bands, based on your income. Any capital gain is added on top of your other taxable income, and the part that falls into the basic rate band is taxed at 18%; anything above that is taxed at 24%.
- Example: If your taxable income (after your Personal Allowance) is £35,000 and you realise a gain of £20,000, after your £3,000 CGT allowance your taxable gain is £17,000. You have £15,271 of your basic-rate band remaining, so £15,271 of the gain is taxed at 18% (£2,748), and the remaining £1,729 is taxed at 24% (£415).
Basically, the longer you hold an asset, the more opportunities you have to plan, whether by spreading disposals over multiple tax years or making use of available reliefs.
Smart Strategies to Reduce Your Capital Gains Tax Bill
While CGT may be unavoidable, it’s far from unmanageable. Here are a couple of proven strategies investors can use to reduce their tax burden and optimise outcomes:
1. Use Your Allowance (Before You Lose It)
Each individual has a £3,000 annual CGT allowance, and once it’s gone, poof, it’s gone. By managing when and how you dispose of assets, you can spread gains across years and make use of multiple allowances (yours and your spouse’s, if applicable).
2. Spousal Transfers
Transferring assets between spouses or civil partners doesn’t trigger CGT, and it can be a powerful way to reduce your total tax bill. For instance, if one partner has unused allowance or is in a lower income tax band, sharing the gain can reduce the overall rate paid.
3. Harvest Losses
Known as “loss harvesting,” this involves selling underperforming investments to realise a loss. These losses can be used to offset gains, reducing your CGT liability. Just be mindful of “bed and breakfasting” rules, which prevent you from repurchasing the same asset within 30 days.
4. Use Tax-Deferred or Tax-Exempt Wrappers
Holding investments inside ISAs or pensions means no CGT is due on gains made. This makes these wrappers invaluable for building long-term wealth while keeping your future tax bill in check.
5. Time Your Disposals
Selling assets across different tax years, or when your income is temporarily lower (e.g. after retirement or during a career break), can reduce the rate at which CGT applies. Planning disposals with income in mind is a subtle but effective tactic.
If you’re selling UK residential property that triggers a capital gain, you’re required to report and pay the CGT within 60 days of the sale completing. Missing this deadline can result in penalties and interest charges, so it’s always best to make a diary note!
Dividends, Interest & Income Tax
Capital gains aren’t the only way investments grow, income from dividends and interest is also taxed, albeit differently.
Dividends
If you own shares that pay dividends, you get a £500 annual dividend allowance. These figures are current as of 2025/26 (HMRC dividend guidance). Anything above that is taxed at:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate
- 39.35% for additional rate
This is on top of your other income, so the tax band you fall into matters.
What’s changing from April 2026
Following the 2025 Budget, dividend tax rates will rise by 2 percentage points for the 2026/27 tax year onwards:
- 10.75% for basic-rate taxpayers
- 35.75% for higher-rate
- 39.35% for additional-rate (unchanged)
The dividend allowance remains at £500 unless future legislation states otherwise.
Interest Income
Interest from bonds, savings accounts, or corporate loans is taxed as income. The Personal Savings Allowance remains at £1,000 for basic rate taxpayers, £500 for higher rate and £0 for additional rate.
Optimising Returns
Using ISAs to hold dividend or interest paying investments is one of the easiest ways to avoid unnecessary tax. You can also consider diversifying your portfolio to balance income-producing assets with growth-focused ones, especially if you’re nearing or over those allowances.
Don’t Let Tax Undermine Your Investment Strategy
Good investing isn’t just about picking the right assets, it’s about knowing when and how to realise the gains. With CGT allowances shrinking and the tax treatment of investment income tightening, the need for deliberate planning has never been greater.
Whether you’re selling a business, managing a long-held share portfolio or simply making the most of your annual ISA and pension allowances, a tailored capital gains tax planning strategy can help you protect more of your wealth.
Want to run the numbers? Speak to a trusted financial adviser about your next steps.
Some links will make you leave the website of Informed Financial Planning and view the content of an external website. Informed Financial Planning cannot be held responsible for the content of external websites
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Tax treatment depends on individual circumstances and may be subject to change in the future.
