Capital Gains Tax Annual Exemption: Reduction and Potential CGT Rate Increases
Published / Last Updated on 13/10/2026
Capital Gains Tax Annual Exemption: How Lower Allowances and Potential Tax Rises Could Affect Investors
Capital Gains Tax (CGT) has become a major talking point as the Government faces growing pressure from high inflation, increasing public spending commitments, rising borrowing costs and the need to fund essential services. With ongoing speculation about future tax policy, many investors, landlords and business owners are wondering whether Capital Gains Tax rates could rise further in future Budgets.
While any proposed changes remain speculative, one significant change has already happened: the dramatic reduction of the Capital Gains Tax annual exemption.
For anyone considering selling investment assets, understanding the impact of both lower allowances and potentially higher tax rates has never been more important.
What Is Capital Gains Tax?
Capital Gains Tax is payable when you make a profit from selling or disposing of certain assets, including:
- Investment properties
- Buy-to-let properties
- Shares and investments held outside tax wrappers
- Business assets
- Certain valuable possessions
CGT is charged on the gain you make rather than the total sale proceeds.
Calculating Your Capital Gain
When calculating your taxable gain, you can generally deduct:
- The original purchase price
- Stamp Duty Land Tax
- Legal fees incurred when buying and selling
- Estate agent fees
- Certain improvement costs
For example:
| Description | Amount |
| Property sale price | £200,000 |
| Purchase price | (£150,000) |
| Gross gain | £50,000 |
| Buying and selling costs | (£10,000) |
| Net gain | £40,000 |
Assuming a net gain of £40,000, you then deduct your annual CGT exemption. Under current rules, this is £3,000, leaving a taxable gain of £37,000.
The Sharp Reduction in the CGT Annual Exemption
Many taxpayers are unaware that the Capital Gains Tax annual exemption has been significantly reduced over the last few years.
History of the CGT Annual Exemption
| Tax Year | Annual Exemption |
| 1965 | £1,000 |
| In between these years | Regular rises until recent times |
| 2014/15 | £11,000 |
| 2015/16 | £11,100 |
| 2017/18 | £11,300 |
| 2018/19 | £11,700 |
| 2019/20 | £12,000 |
| 2020/21 to 2022/23 | £12,300 |
| 2023/24 | £6,000 |
| 2024/25 onwards | £3,000 |
The annual exemption reached its highest level of £12,300 but has since been cut by more than 75%.
For investors who regularly realise gains from shares, investment properties or business disposals, the reduction means a significantly larger proportion of profits is now exposed to tax.
The Impact of the Reduced Exemption
Let's compare a £40,000 net capital gain over time.
Example: £40,000 Net Gain
| Tax Year | Annual Exemption | Taxable Gain |
|---|---|---|
| 2020/21 | £12,300 | £27,700 |
| 2022/23 | £12,300 | £27,700 |
| 2023/24 | £6,000 | £34,000 |
| 2024/25 | £3,000 | £37,000 |
As the exemption has fallen, the taxable portion of the gain has increased by £9,300.
This means many investors are paying considerably more tax today than they would have paid only a few years ago, even if the gain itself has not changed.
Could Capital Gains Tax Rates Rise Further?
Recent tax discussions have included suggestions that CGT rates could move closer to income tax rates.
Currently, residential property gains may be taxed at rates of up to 24% for higher-rate taxpayers. However, some commentators have speculated that future governments could align CGT more closely with income tax rates.
Using a £40,000 net gain and the current £3,000 exemption:
| Scenario | Taxable Gain | Tax Rate | Tax Payable |
| Current Higher Rate CGT | £37,000 | 24% | £8,880 |
| Hypothetical Future Rate | £37,000 | 42% | £15,540 |
Under this illustrative example, the tax bill would increase by £6,660.
For investors planning future disposals, this demonstrates why tax policy changes can have a significant impact on overall returns.
Why Some Investors Use Their Annual Exemption Each Year
Many experienced investors seek to utilise their annual exemption regularly rather than allowing gains to accumulate over long periods.
Common strategies include:
- Gradually selling investment holdings
- Realising gains on shares over several tax years
- Restructuring portfolios
- Planning business exits over an extended period
By making use of available exemptions each year, investors may reduce the amount of gain exposed to future tax changes.
Professional advice is essential before implementing any strategy, particularly where anti-avoidance rules may apply.
Capital Gains Tax and Trusts
Trusts can also be affected by CGT changes.
A trust is generally treated as a separate taxable entity and has its own Capital Gains Tax annual exemption. However, the exemption available to trustees is typically lower than that available to individuals.
For many trusts, the annual exemption is generally 50% of the personal annual exemption.
This means that where an individual currently benefits from a £3,000 exemption, many trusts may only have a £1,500 exemption available.
Could Trust Tax Rates Increase?
Some commentators have suggested that future reforms could bring trust CGT rates closer to trust income tax rates.
If that occurred, trustees disposing of assets could face significantly larger tax liabilities, making advance planning increasingly important.
Planning Ahead
The reduction in the annual Capital Gains Tax exemption is no longer speculation, it is already a reality. Investors, landlords, business owners and trustees now have far less tax-free capacity than they enjoyed only a few years ago.
With ongoing discussions around public finances and future tax policy, individuals considering selling assets may wish to review:
- The timing of planned disposals
- Available annual exemptions
- Spousal planning opportunities
- Trust structures
- Investment portfolio strategies
- Business exit planning
While nobody can predict future Budgets with certainty, understanding the rules and planning ahead can help ensure that more of your hard-earned gains remain in your pocket rather than being lost to unnecessary tax.
Key Takeaway
The Capital Gains Tax annual exemption has fallen from £12,300 to just £3,000 in a relatively short period. As a result, more gains are becoming taxable. If future governments increase CGT rates as well, investors disposing of assets could face significantly larger tax bills, making proactive tax planning more valuable than ever.
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