8 ways to reduce capital gains tax

Capital gains tax (CGT) can significantly impact your investment returns, so understanding how it works – and how to manage it effectively – is essential for long-term financial planning.

CGT is charged on the profit made when you sell certain assets that have increased in value, such as individual shares and certain types of bonds¹ (UK government bonds are exempt). The CGT rate is typically 18% for basic-rate taxpayers and 24% for higher-rate taxpayers². However, you only pay CGT on profits that exceed your annual CGT allowance, which is currently £3,000.

There are are several ways to reduce your exposure or even avoid CGT completely, which we explore below. However, it’s a complex subject, so we’d suggest speaking to a tax adviser if you’re unsure.

1. Make maximum use of tax-efficient wrappers

The simplest way to reduce capital gains tax is to invest within an individual savings account (ISA). The ISA allowance is currently £20,000 a year³ and all growth and income within the ISA is free from CGT and income tax.

Alternatively, if you’re happy to lock in money until your retirement⁴, you could consider saving more money in pensions, such as a self-invested personal pension (SIPP). Money inside a pension is shielded from CGT and you’ll benefit from tax relief on personal pension contributions. Most people can get tax relief on contributions of up to 100% of gross relevant earnings, capped at £60,000⁵.

By using these accounts fully, you can protect your investments from CGT over the long term.

2. Use ‘bed and ISA’ to move investments into a tax-efficient wrapper

If you hold investments outside ISAs and pensions, you can still move them into a tax-efficient account.

For example, if you haven’t used up your ISA allowance and aren’t intending to do so with ‘new’ money, you could consider a ‘bed and ISA’ transaction. This is where you sell holdings in your general account and then buy back the same holdings within your ISA. You end up with the same portfolio as before, but your investments are housed in a more tax-efficient account. Although the initial sale would be subject to CGT, you won’t have to pay tax on any future profits.

Find out more about bed and ISA with Vanguard.

3. Use ‘bed and pension’ to gain tax relief and reduce future CGT

It’s also possible to move existing investments into a pension through a similar process known as ‘bed and pension’. You sell holdings in your general account and then buy back the same holdings within your pension. Future growth will be tax free and you’ll also earn tax relief on your pension contribution.

To carry out a bed and pension with Vanguard, you’ll need to sell holdings in your general account, transfer the proceeds to your bank account, and then use the cash to make a pension contribution. This means the process will take a little longer than with bed and ISA. Make sure you have a verified bank account linked to your Vanguard account for us to make the payment.

Also, beware that the more you trade, the harder it can be to work out the gain or loss on sales of your investments. You may wish to consult a tax expert. 

4. Use your CGT allowance every year

The CGT allowance is a ‘use it or lose it’ allowance, which means you can’t carry it forward into subsequent tax years. So, you may want to consider making full use of your allowance before the tax year ends. 

If you plan to sell an investment and the gain would exceed your CGT allowance, you could consider spreading the sale over a number of tax years. For example, you could sell part of the investment at the end of the tax year on 5 April and the rest at the start of the next tax year on 6 April. This allows you to use two annual allowances and it may mean you reduce or eliminate your CGT exposure. However, you’ll need to calculate your likely profits for each transaction very carefully, so you don’t inadvertently breach the allowance. A tax adviser can help with this.

5. Offset gains by making use of allowable losses

If you sell an investment at a loss, you can use that loss to reduce your tax bill. When you report a loss to HMRC, it is deducted from any gains you made in the same tax year, helping to lower your CGT liability.

If your total taxable gains are still above the CGT allowance after using your current year’s losses, you can also use losses from previous years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year. This means if you make a loss one year, you can save it and use it to reduce your taxable gains in the future.

To do this, you must report your losses to HMRC, and you have up to four years after the end of the tax year when you sold the investment to claim them. You can find out more about reporting losses on the HMRC website.

6. Transfer assets to your spouse or civil partner to reduce CGT

Transfers between spouses and civil partners are usually tax-free, which means you could work as a couple to better manage your CGT liabilities. For example, you could transfer investments to the partner who is in a lower tax bracket, doesn’t work or hasn’t fully used their CGT allowance⁶.

Each individual has their own allowance, which means that each married couple in 2025-26 has the potential to realise tax-free capital gains of up to £6,000.

7. Manage your taxable income to keep CGT rates down

As mentioned earlier, CGT rates depend on your income tax band, so reducing your taxable income can help to lower your CGT rate. 

One way to reduce your taxable income is to contribute more to your pension. Higher-rate income tax kicks in once your income exceeds £50,270. So, if your income is £60,270, you’d pay 40% tax on the £10,000 of income that falls within the higher-rate tax band. But if you made a £10,000 pension contribution (£8,000 plus £2,000 tax relief) to a SIPP, your ‘adjusted net income’⁷ would fall to £50,270, which is in the basic-rate tax band. The tax relief would be obtained through an extension of your basic-rate tax band, which can be done by filling in a tax return.

8. Invest through funds

Investing through well-diversified funds, such as Vanguard’s straightforward and low-cost range, rather than individual shares and bonds⁸, can also limit your CGT exposure. 

This is because investors don’t pay CGT on any capital gains that a fund makes when it buys and sells its underlying assets. It’s only when you sell your units in the fund – assuming you haven’t done so inside an ISA or SIPP – that having to pay CGT becomes a possibility.

A final note – be mindful of CGT later in life

Capital gains are wiped out on death, which means selling assets later in life can sometimes lead to unnecessary tax. This is because your estate may have to pay inheritance tax (IHT) when you die, so selling assets late in life could effectively mean paying tax on the same asset twice: once via CGT and again via IHT. If in doubt, contact your financial adviser.

You can’t choose whether to pay CGT or not. With careful planning, though, you can reduce your potential bill by making the best use of the available reliefs and allowances.

¹ Bonds are a type of loan issued by governments or companies, which typically pay a fixed amount of interest and return the capital at the end of the term.

² For more information on CGT rates see HMRC’s website.

³ Tax year 2025-26.

⁴ The earliest you can access your private pension money is age 55, rising to 57 from 6 April 2028.

⁵ For more on what counts as ‘relevant earnings’ that can earn tax relief when used to fund a pension, see the HMRC Pensions Tax Manual. Your annual allowance might be lower than £60,000 if you have a high income or you’ve already flexibly accessed your pension pot. To work out if you have a reduced (tapered) annual allowance, see HMRC’s website. If you’ve flexibly accessed your pension, you can work out what your alternative annual allowance is here.

⁶ Capital gains tax, civil partners and spouses, HMRC. Updated April 2025.

⁷ Adjusted net income is total taxable income before any personal allowances and after certain tax reliefs. To work out your adjusted net income, see HMRC’s website.

⁸ Except for bonds issued by the UK government, which do not incur CGT. View full list.

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This article is designed for use by, and is directed only at persons resident in the UK.

The information contained herein is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information does not constitute legal, tax, or investment advice. You must not, therefore, rely on it when making any investment decisions.

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