Investor Guide: Navigating Capital Gains Tax Allowance Changes in 2025/26

The 2025/26 tax year marks a critical point for UK investors, especially with the continued reduction in capital gains tax (CGT) allowances, commonly known as the annual exempt amount (AEA), alongside rising CGT rates. These changes have created significant tax pressures for investors, reducing the effectiveness of allowances and gradually eroding gains. Understanding the latest changes and strategies for mitigating CGT liability is crucial for maximizing your returns and minimizing taxes.

What is the Capital Gains Tax Allowance for 2025/26?

For the 2025/26 tax year, the capital gains tax allowance has been slashed to just £3,000, down from £12,300 in 2022/23. This reduction of more than 75% means that investors will pay capital gains tax on any profits exceeding this threshold at their marginal tax rate.

The rates applied to CGT depend on an investor’s income tax bracket and the type of asset being sold, with residential property subject to higher rates. Here’s a breakdown of the capital gains tax rates for the 2025/26 tax year:

Tax Bracket	Income Range	CGT Rate on Assets	CGT Rate on Property
Basic Rate	£12,571 to £50,270	18%	18%
Higher Rate	£50,271 to £125,139	24%	24%
Additional Rate	Over £125,140	24%	24%

This drastic reduction in the annual allowance significantly increases the tax burden on investors, especially as asset values continue to rise with inflation.

How Does the 2025/26 CGT Allowance Compare to Past and Future Years?

Historically, the capital gains tax allowance had steadily increased, reaching £12,300 by 2020/21. However, the 2023/24 tax year saw the first reduction in 35 years, bringing the allowance down to £6,000. The following year, the allowance halved again to £3,000, marking the lowest point since 1981.

While the allowance remains at £3,000 for 2025/26, there is no guarantee that it won’t be further reduced in the future. The ongoing trend of decreasing allowances, alongside rising CGT rates, highlights the importance of strategizing to reduce taxable gains.

What Does This Mean for Investors?

With the allowance shrinking to just £3,000, investors will face higher taxes on their capital gains. Those with gains above this amount will see additional gains taxed at their marginal CGT rates. For example, an investor taxed at the highest marginal rate of 28% will pay an additional £2,604 in CGT per year with just £9,300 in taxable gains.

The shrinking of fixed allowances has worsened the impact of fiscal drag, where rising asset values outpace the exempt amount, leading to more taxable gains without any corresponding increase in purchasing power. This trend is particularly troublesome for experienced investors, who may find their high-return investments being eroded by higher taxes.

Understanding the Rules Surrounding the CGT Allowance

There are several key rules to understand regarding the capital gains tax allowance:

• Single Allowance per Individual: The CGT annual allowance applies to all of an individual’s capital gains within a given tax year. It cannot be shared between spouses or transferred.
• No Carry Forward: Any unused portion of the CGT allowance cannot be carried forward to future years. It’s vital to make use of the full allowance each tax year.
• Reporting Requirements: If your gains exceed the annual exempt amount, you must report the excess to HMRC and pay the applicable tax.
• Trust Rules: For trusts, the capital gains tax exemption is generally half of the individual’s allowance, which means a £3,000 exemption for trusts in the 2023/24 tax year.

Special Exemptions and Deductions

Although the reduction in the CGT allowance puts pressure on investors, there are still several exemptions and reliefs available to mitigate CGT liability:

• Main Residence Relief: If you sell your primary home, you may be eligible for up to £6,000 of CGT relief per person on the sale of your residence.
• Entrepreneurs’ Relief: If you sell all or part of your business, you could qualify for a reduced CGT rate of 10% on up to £1 million of qualifying assets.
• Gift Hold-Over Relief: When giving away assets to a family member or charity, gift hold-over relief can prevent you from paying CGT upfront, although the recipient will face CGT when the asset is sold.
• Loss Relief: If you incur a loss on an investment, you can offset it against other gains in the same tax year. If there are no gains, you can carry the loss forward to offset future gains.

These exemptions provide important tax reliefs, but their applicability depends on individual circumstances.

Tools to Mitigate Capital Gains Tax

Beyond the basic exemptions, several tax-efficient schemes and tools are available to investors looking to minimize their CGT liabilities. These tools can help offset the impact of the reduced CGT allowance and potentially eliminate CGT altogether:

1. Enterprise Investment Scheme (EIS) & Seed Enterprise Investment Scheme (SEIS)

Both EIS and SEIS are designed to encourage investment in early-stage businesses by offering a range of tax reliefs, including:

• CGT Exemption: Gains on EIS and SEIS shares are exempt from CGT when sold.
• CGT Deferral (EIS): If you reinvest gains into EIS-eligible shares, you can defer the CGT liability to a future date.
• CGT Reinvestment Relief (SEIS): If you reinvest gains into SEIS-eligible shares, you can reduce your CGT liability by up to 50%.

2. Venture Capital Trusts (VCTs)

VCTs offer a tax-advantaged way to invest in a portfolio of small, unquoted companies. VCTs offer:

• CGT Exemption: Any gains made from selling VCT shares are exempt from CGT.
• CGT Deferral: You can defer CGT liabilities by investing in VCTs, though they don’t provide the same inheritance tax exemption or loss relief as EIS and SEIS.

3. Individual Savings Accounts (ISAs)

Investing in ISAs is one of the simplest ways to avoid CGT. Any gains made within an ISA are completely tax-free, including:

• Tax-free Capital Gains: Any profit from the sale of assets within an ISA is exempt from CGT.
• Tax-free Income: Dividends and interest earned in an ISA are also exempt from tax, up to the annual contribution limit of £20,000.

4. Self-Invested Personal Pensions (SIPPs) and Small Self-Administered Schemes (SSASs)

Both SIPPs and SSASs allow investors to hold a wide range of investments while benefiting from full CGT exemption. These pension schemes also offer additional tax benefits, including the ability to invest in a variety of asset classes.

Selecting the Right Approach

With so many tools and strategies available, the best approach for mitigating CGT depends on individual goals and circumstances. For those seeking long-term tax-free growth and the flexibility to defer CGT, the EIS or SEIS may be ideal. Investors looking to build a tax-efficient pension pot might find SIPPs or SSASs more suitable.

As the CGT allowance continues to shrink, it is increasingly important for investors to explore all available tax-efficient options. By strategically utilizing these tools, you can better manage your capital gains tax exposure and safeguard your returns.

Conclusion

With the capital gains tax allowance nearing its lowest level in decades, now is the time to reassess your investment strategy. Understanding how the new changes to CGT impact your investments, and utilizing tax-efficient options like EIS, SEIS, VCTs, ISAs, and SIPPs, can help you preserve more of your wealth. Staying proactive and informed will ensure you can make the most of your investments, despite the tightening tax landscape.