Navigating Capital Gains Tax in the 2025/26 tax year

The landscape of Capital Gains Tax (CGT) in the UK has undergone significant shifts in recent years, with allowances shrinking and rates adjusting. For the 2025/26 tax year, these changes continue to impact investors, making a proactive approach to portfolio management more critical than ever.

The shrinking CGT allowance

The individual CGT allowance has seen a dramatic reduction. After being £12,300 for the 2022/23 tax year, it dropped to £6,000 in 2023/24 and further to £3,000 for the 2024/25 tax year, where it remains for 2025/26. This sustained reduction means that many more individuals are now liable for CGT on smaller gains, potentially requiring them to complete a self-assessment tax return or the CGT section for the first time.

Understanding CGT rates in 2025/26

The rates at which CGT is charged have also seen adjustments, depending on the asset type and your income tax band.

• For residential property gains:
• basic rate taxpayers will pay 18%
• higher and additional rate taxpayers will pay 24%.
• For gains on all other assets (e.g., shares, funds, excluding residential property):
• basic rate taxpayers will pay 18%
• higher and additional rate taxpayers will pay 24%.

It's crucial to remember that your taxable capital gains are added to your taxable income to determine which tax band (basic, higher, or additional rate) your gains fall into. This can push you into a higher band, meaning a larger portion of your gain is taxed at the 24% rate.

Reporting thresholds: Beyond the allowance

Even if your capital gains are below the annual exempt amount, you might still need to report them to HMRC. For the 2025/26 tax year, you generally need to report capital gains if:

• your gains (before deducting any losses) are more than the annual exempt amount (£3,000)
• your gross proceeds from selling assets (the total sale price, not just the profit) are more than £50,000.

Key reliefs and exemptions

Beyond the annual allowance, several reliefs can reduce or eliminate a CGT liability.

• Private Residence Relief (PRR): You generally won't pay CGT when you sell your only or main home. This relief usually extends to the last nine months of ownership, even if you were not living there, and potentially longer in specific circumstances (e.g., if you're disabled or in a care home). However, the relief can be restricted if a portion of your home has been used exclusively for business or if the grounds exceed a certain size.

The Impact on portfolio management

The tightened CGT regime has several implications for investors and their financial advisors

• ‘Portfolio Drift’: A significant concern is the potential for ‘portfolio drift’. To avoid realising gains that exceed the reduced allowance, investment managers might be forced to delay or avoid necessary rebalancing of a portfolio. This can lead to the asset allocation diverging from the client's desired risk profile, potentially exposing them to more (or less) risk than they are comfortable with.
• Funding ISAs: Even seemingly simple actions, like selling investments from a taxable portfolio to fund an Individual Savings Account (ISA), can trigger a CGT liability if the gains realised exceed the £3,000 allowance.
• Corporate actions: Investors also need to be aware of corporate actions (e.g., mergers, takeovers, share reorganisations) that can lead to an involuntary disposal of holdings. These events are outside the control of an investment manager but can result in the realisation of a gain and a subsequent CGT liability.

Strategic considerations: Paying CGT and maximising wrappers

While no one enjoys paying tax, the current CGT rates still remain more favourable than income tax rates (20%, 40%, and 45% for the basic, higher, and additional rates, respectively). For example, an additional-rate taxpayer would pay 24% on gains realised in excess of the £3,000 annual allowance, compared to a potential 45% income tax rate.

Given the relatively low rates at which CGT is charged, clients should have candid discussions with their financial advisors about whether strategically realising some gains and paying CGT could be beneficial in the long run. For instance, exceeding the current annual allowance by £9,300 (to match the 2022/23 allowance of £12,300) would result in a CGT liability of approximately £2,232 for a higher or additional rate taxpayer. This relatively small tax payment can allow for proper portfolio management, ensuring the risk profile remains on track and the investment manager can actively manage the portfolio in line with overall objectives.

• Utilising capital losses: If you dispose of an asset at a loss, you can offset these capital losses against any capital gains in the same tax year, reducing your taxable gain. If your losses exceed your gains, you can carry forward the excess indefinitely to offset future gains. Remember to report any losses to HMRC within four years to ensure they are available for future use.
• Transfers between spouses or civil partners: A highly effective planning tool involves transferring assets between spouses or civil partners. Such transfers are treated on a 'no gain/no loss' basis for CGT purposes, meaning no tax is due on the transfer itself. This allows couples to utilise both individual annual CGT allowances (totalling £6,000 for 2025/26) or to transfer assets to the partner with a lower income to potentially benefit from their basic rate CGT band upon a future sale.

Furthermore, the reduced CGT allowance underscores the immense value of tax-efficient wrappers like ISAs and pensions. Funds held within these structures grow free of CGT and income tax, effectively shielding investors from many of the CGT complexities discussed above. Maximising these allowances should be a cornerstone of any long-term investment strategy.

Other CGT considerations

• Gifting assets: When you gift an asset (other than to your spouse or civil partner, or a charity), it's generally treated as a disposal at market value for CGT purposes. This means the person giving the gift might incur a CGT liability. Certain business or agricultural assets may qualify for 'hold-over relief', as will transfers into or out of a relevant property trust, deferring the tax until the recipient sells the asset.
• Inheritance and death: Importantly, there is no CGT payable on assets when an individual dies. Instead, the person inheriting the asset is deemed to acquire it at its market value on the date of death. If the beneficiary later sells the asset for more than this probate value, they will be liable for CGT on that subsequent gain. Executors may also be liable for CGT if they sell assets from the estate during the administration period.

The importance of record keeping

Navigating CGT effectively hinges on meticulous record-keeping. Ensure you retain all documentation relating to the purchase, sale, and any significant improvement costs of your assets. Accurate records are essential for calculating your gains or losses correctly and for complying with HMRC's reporting requirements.

For clients with taxable portfolios who have not yet explored the implications of the reduced CGT allowance with their financial advisor, it is highly advisable to do so without delay. Making informed decisions about CGT can prevent unwelcome surprises when completing your tax return and ensure your investment strategy remains robust and aligned with your goals.