How Is Capital Gains Tax Calculated When You Sell?

The basic formula

Capital Gains Tax is not charged on the money you receive. It is charged on your gain, which is roughly what you sold something for minus what it cost you to get it and get rid of it.

The calculation runs in this order:

1. Disposal proceeds - the sale price, or market value if you gave the asset away or sold it to a connected person such as a family member.
2. Minus the cost basis - what you originally paid, plus certain other costs (more on this below).
3. Minus allowable costs - stamp duty or SDLT on purchase, legal fees, surveyor and estate agent fees, auction commission, and capital improvements that are still reflected in the asset.
4. Equals the gain.
5. Minus losses - losses on other disposals in the same tax year, then unused losses carried forward from earlier years.
6. Minus the annual exempt amount - £3,000 for individuals in 2025/26. This figure has been cut repeatedly in recent years and can change again at any Budget.
7. Whatever is left is taxed, at a rate that depends on your income and the type of asset.

For disposals on or after 30 October 2024, the main rates are 18% for gains falling inside your unused basic rate band and 24% for gains above it. Residential property that is not your main home is taxed at the same 18% and 24%. Business Asset Disposal Relief is charged at 14% for disposals from 6 April 2025 and is legislated to rise to 18% from 6 April 2026, subject to a £1 million lifetime limit. These rates are policy, not physics, so check them against the tax year you are actually disposing in.

Why your income in the year matters so much

This is the part people miss. CGT rates are not fixed to the asset. Your taxable gains are stacked on top of your taxable income, and the rate depends on how much of your basic rate band is left.

In 2025/26 the basic rate band runs to £37,700 of taxable income above the personal allowance. If your income uses up all of it, every pound of gain is taxed at 24% (or 18% up to the residential rates for property). If you earn very little in a year, a chunk of your gain falls into the leftover band and is taxed at 18% instead.

So selling shares in a low-income year genuinely can cost you less tax. Take someone who takes a career break and has £15,000 of employment income for the year. Their personal allowance covers £12,570, leaving £2,430 of taxable income. That means roughly £35,270 of basic rate band is unused. If they realise a £40,000 gain, the first £3,000 is covered by the annual exempt amount, then a large slice of the remaining gain is taxed at 18% and only the excess at 24%. The same gain in a year when they earn £70,000 would be taxed entirely at 24%.

Two warnings on this. First, the calculation is done on the whole year, so a redundancy payment, a pension lump sum or a bonus landing in the same tax year can quietly eat the band you were counting on. Second, the tax year of disposal is set by the date of the contract, not the date the money arrives. For shares, that is usually the trade date. Timing a sale a few days either side of 5 April can move the whole gain into a different year, but only if the contract date moves too.

Working out cost basis on something you have held for years

The cost basis is where most real calculations fall apart, because the paperwork is 20 years old and lives in a loft.

Start with what you actually paid, then add:

• Incidental costs of acquisition: stamp duty, legal fees, survey fees, broker commission.
• Enhancement expenditure: capital improvements that are still part of the asset at the point of sale. A new extension counts. Repainting and repairs do not, because they are revenue costs, not capital.
• Incidental costs of disposal: agent fees, legal fees, advertising.

If you did not buy it, the rules change. Inherited assets take the probate value at the date of death as their base cost, not what the deceased paid. Assets received as a gift usually take market value at the date of the gift, unless holdover relief was claimed, in which case you inherit the giver's original cost. This distinction can swing a bill by tens of thousands of pounds, so it is worth pinning down which applies before you do any arithmetic.

Assets owned before 31 March 1982 are rebased to their market value on that date. The original 1970s purchase price is irrelevant. You will usually need a retrospective valuation.

Shares need the pooling rules. You cannot simply pick the cheapest lot you bought. Disposals are matched first against shares acquired on the same day, then against shares acquired in the following 30 days, then against the Section 104 pool, which is a running average cost of everything else you hold in that company. Every purchase adds to the pool and raises the average cost; every sale removes a proportionate slice. Accumulation units in funds are worse still, because reinvested income increases your base cost and is easy to forget, which leads people to overstate their gain and overpay.

If you genuinely have no records, HMRC expects a reasonable, documented estimate rather than a guess. Old bank statements, Land Registry entries, broker contract notes and probate files are the usual routes back.

Selling part of your land or garden

Selling a slice of a larger holding is not a matter of guessing what proportion of the cost relates to that slice. There is a statutory formula.

You allocate cost using A divided by (A + B), where A is the proceeds from the part you sold and B is the market value of the part you kept at the date of the disposal. That fraction of your total cost basis is deducted from the sale proceeds; the rest stays with the retained land for a future disposal.

So if you paid £200,000 for a plot, sell a corner for £80,000, and the retained land is worth £320,000 immediately afterwards, the fraction is 80,000 / 400,000 = 20%. You deduct £40,000 of cost, giving a gain of £40,000 before reliefs.

Three things complicate this in practice:

• You need a valuation of the retained land, which usually means a surveyor. This is the step most people skip and most often get challenged on.
• Small part disposals of land can sometimes be deferred rather than taxed, where the proceeds are below £20,000 and no more than 20% of the value of the whole holding. Instead of a gain now, the proceeds reduce your base cost for later.
• Private Residence Relief may cover part or all of a garden sale, but only within the permitted area (generally half a hectare including the house) and generally only if you sell the land before or with the house, not after you have moved out.

If planning permission has been obtained, or you bought with the intention of developing and selling on, HMRC may argue the profit is trading income taxed as income rather than a capital gain. That is a materially different bill.

Reporting and deadlines

UK residential property gains must be reported and paid through HMRC's online service within 60 days of completion, separately from your tax return. Other gains generally go on your Self Assessment return by 31 January after the tax year, or through HMRC's real-time service. Losses need to be claimed within four years to be usable.

Want the full working? What You'll Actually Owe (£19) takes you through complete worked examples for part-disposals, share pools and low-income-year timing, with a records checklist for reconstructing cost basis and the reliefs most people miss.

This article is general education about how the rules work, not personal tax advice. Your own position may differ.