How to Avoid Capital Gains Tax in the UK

Capital Gains Tax (CGT) in the UK is a tax levied on the profit made when an asset that has increased in value is sold or otherwise disposed of. This tax applies to the gain, not the total amount of money received from the disposal of the asset. Common assets subject to CGT include shares, investment properties, business assets, and certain valuables. This article provides guidance on legitimate strategies to reduce or eliminate CGT liabilities within UK tax regulations.

Maximizing Available Allowances

Individuals in the UK can reduce their Capital Gains Tax liability by utilizing available allowances. These allowances provide opportunities to realize gains without incurring a tax charge.

The Annual Exempt Amount (AEA) allows individuals to make a certain amount of capital gains each tax year before any tax becomes due. For the 2025/2026 tax year, this allowance is £3,000 for individuals. Gains up to this threshold are tax-free. The AEA operates on a “use it or lose it” basis; any unused portion cannot be carried forward. For married couples or civil partners, assets can be transferred between them without incurring CGT, potentially allowing both partners to utilize their individual AEAs when a subsequent disposal occurs.

Capital Loss Relief provides a mechanism to offset capital gains. If an individual sells an asset for less than its acquisition cost, a capital loss arises. These losses can be used to reduce capital gains made in the same tax year. If total capital losses exceed capital gains in a given tax year, the excess loss can be carried forward indefinitely. This carried-forward loss can then be used to offset future capital gains, reducing the taxable amount in subsequent years.

Leveraging Specific Asset Exemptions

Certain types of assets in the UK are either fully exempt from Capital Gains Tax or qualify for relief under specific conditions. Principal Private Residence Relief (PPR), also known as Main Residence Relief, typically exempts gains made on the sale of an individual’s only or main home from CGT. To qualify, the property must have been occupied as the taxpayer’s main residence throughout the period of ownership. The final nine months of ownership automatically qualify for PPR, regardless of whether the owner was living in the property during that time, provided it has been their main residence at some point.

Gains made within Individual Savings Accounts (ISAs) and registered pension schemes are generally exempt from CGT. ISAs offer a tax-free wrapper, meaning any profits from investments held within an ISA are not subject to CGT upon disposal. Growth and gains within registered pension schemes accumulate free from CGT, allowing investments to grow tax-efficiently until retirement.

UK Government Gilts, bonds issued by the UK government, are exempt from Capital Gains Tax. Similarly, certain Qualifying Corporate Bonds (QCBs) are also exempt from CGT. These are typically debt securities issued in sterling without conversion rights into shares or other currencies.

Personal Chattels, tangible movable property, have specific rules regarding CGT. Gains from the disposal of chattels sold for £6,000 or less are generally exempt from CGT. For items considered “wasting assets,” which have a predictable life of 50 years or less, any gains are usually exempt from CGT. Private cars are always exempt.

Employing Investment Deferral Schemes

The UK government offers investment schemes designed to encourage investment in qualifying companies, providing CGT deferral or exemption benefits. The Enterprise Investment Scheme (EIS) allows investors to defer CGT on gains reinvested into qualifying EIS shares. This deferral relief applies to gains from the disposal of any chargeable asset, provided the reinvestment into EIS-qualifying shares occurs within 12 months before and 36 months after the gain arises. The deferred gain becomes chargeable when the EIS shares are disposed of, or if certain conditions are no longer met. Gains made on the disposal of the EIS shares themselves can be exempt from CGT if held for at least three years and income tax relief was received and not withdrawn.

The Seed Enterprise Investment Scheme (SEIS) targets very early-stage companies, offering generous tax incentives due to the higher risk involved. Any gain from the disposal of SEIS shares can be 100% exempt from CGT if held for at least three years and income tax relief was obtained. SEIS also offers a reinvestment relief where 50% of a capital gain from another asset can be exempt from CGT if reinvested into SEIS-qualifying shares. The maximum gain relieved through SEIS reinvestment is capped, for example, at £100,000.

Venture Capital Trusts (VCTs) are listed companies that invest in unquoted trading companies. Gains from the disposal of VCT shares are exempt from CGT. To qualify, VCT shares must be held for a minimum period, typically five years for income tax relief and generally for CGT exemption. The exemption is subject to an annual investment limit, currently £200,000 for income tax relief, which also applies for the CGT exemption on disposal.

Strategies for Business Asset Disposals

Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief, can reduce the Capital Gains Tax rate on qualifying business asset disposals. BADR reduces the rate of CGT on qualifying gains to 10%, regardless of an individual’s income tax band. This rate is substantially lower than standard CGT rates, which can be 18% or 24% depending on the asset type and the taxpayer’s income. The relief applies to gains from the disposal of all or part of a business as a sole trader or partner. It also applies to the disposal of shares in a personal company.

To qualify for BADR when disposing of shares in a personal company, the individual must have been an officer or employee of the company and must have held at least 5% of the company’s shares and voting rights. The company must be a trading company or a holding company of a trading group. These qualifying conditions must have been met for a specified period, typically two years, leading up to the date of disposal.

BADR is subject to a lifetime limit on the amount of gains that can benefit from the reduced 10% rate. For disposals on or after 11 March 2020, this lifetime limit is £1 million. Any gains exceeding this lifetime limit will be subject to the standard CGT rates. While there is no limit to the number of times an individual can claim BADR, all claims contribute towards this single lifetime allowance.