A guide to capital gains tax for directors and sole traders

Tax. Just seeing the word is enough to make any business owner panic. If this sounds like you, don’t worry. Let us reassure you that capital gains tax isn’t as scary as it sounds and, unless you are currently selling a major asset, it probably has far less impact on your day–to–day than you think.

In this guide, you’ll learn what capital gains tax is, when it applies to you as a sole trader or director, and the important rate changes coming in April 2026. 

That said, everyone’s situation is different, so it’s always worth chatting to an accountant or tax adviser who can give you personalised guidance if you need it. 

Right, let’s get stuck in.

In this article:

• What is capital gains tax?
• Who pays capital gains tax?
• How is capital gains tax calculated?
• What is the capital gains tax allowance?
• Capital gains tax rates: 2025/26
• Understanding capital gains tax on shares

Capital gains tax (CGT) is a tax on the profit you make when you sell or dispose of a valuable asset.

In this context, ‘dispose of’ isn’t a fancy way of saying you’re throwing something away. In HMRC’s world, the term includes selling an asset, giving it away as a gift or swapping it.

The important thing to note about CGT is: you’re only taxed on the gain (the profit), not the total amount of money you receive.

Example: if you bought an asset for £20,000 and sold it for £35,000, you’ve made a gain of £15,000. That’s the figure CGT is based on, not the £35,000 sale price.

Assets that usually attract CGT include:

• Property/land that isn’t your main home
• Shares
• Cryptocurrencies 
• Business assets
• Personal possessions worth over £6,000, like art, antiques or jewellery

CGT is a personal tax. This means it applies to individuals, not companies. 

If you’re a sole trader, you and your business are legally the same entity. This means if you sell a business van or a piece of land, you’ll personally pay CGT on any gain.

Exempt assets: some things are completely off–limits from CGT, including your main home (under most circumstances), your car, ISA holdings, and UK government bonds or loans (known as gilts).

You can check out HMRC’s helpful list of CGT exempt assets if you’d like to dig deeper.

Short answer: no, but limited companies pay something very similar.

Limited companies don’t pay capital gains tax. Instead, any profit from selling an asset is called a chargeable gain and is taxed under corporation tax. But there’s a bit more to it than that, so stick with us.

When a company sells or disposes of an asset, like an office, equipment, or investments, it needs to add that gain to the company’s overall taxable profits for the year.

Limited companies report chargeable gains through their company tax return (form CT600), which is filed with HMRC each year. 

If this applies to your company, your accountant will almost certainly handle this for you. But it’s useful to know it exists. Knowledge is power!

Good to know: if you want to set up a limited company but haven’t done it yet, you can complete the company registration process with Countingup. It’s quick, easy, and your new company can be up and running within 24 hours. 

Good news if numbers aren’t your thing: the maths is fairly straightforward.

If your company has sold an asset, the chargeable gain is calculated in a similar way to a personal capital gain: 

Sale price – original cost – allowable expenses = your gain

Let’s look at the calculation steps:

• Step 1: work out the sale proceeds (what you received for the asset)
• Step 2: deduct the original cost of the asset (what you paid for it, plus any acquisition costs)
• Step 3: deduct any allowable improvement costs (e.g. estate agent fees or renovation costs for any property)
• Step 4: the remaining figure is your chargeable gain

This gain is then included in your company’s total taxable profit (your final net figure of business earnings) and taxed at your company’s corporation tax rate: 25% for profits above £250,000 in 2025/2026, or 19% for profits up to £50,000 (with marginal relief in between).

What is marginal relief? Marginal relief provides business owners with a gradual increase in corporation tax rate between the small profits rate and the main rate, with the aim of making it more financially manageable.  

If your company sells an asset at a loss, which means you receive less than you originally paid, this is known as an allowable loss. 

Did you know it can be used to reduce your corporation tax bill?

Allowable losses can be set against any chargeable gains made in the same accounting period, which can reduce your overall taxable profit. If the losses exceed the gains in that period, you can carry them forward to offset against future gains. You can’t, however, carry them back to a previous year for corporation tax purposes. Worth keeping this in mind.

For sole traders (and individuals generally), capital gains tax calculations are based on the gain you’ve made. Not the full sale price. 

Here’s an example of how it works:

Say you bought a piece of commercial property in 2015 for £150,000. You sell it in 2026 for £230,000. Your gain is £80,000. After deducting your annual capital gains tax exemption (more on that in a moment), you’d calculate tax on the remaining amount. Scroll down the page to learn about tax rates for CGT. 

Allowable costs you can deduct include:

• The original purchase price
• Buying and selling costs (like solicitor’s fees or estate agent fees)
• The cost of any improvements to the asset (not routine maintenance like fixing a leak)

You might now be wondering: what about selling part of an asset? 

This can get a little more involved. If you sell part of a piece of land, for example, you’ll need to work out what proportion of the original cost relates to the part you’ve sold and use that as your acquisition cost for the calculation. 

HMRC has a couple of handy capital gains tax calculators, including for shares and property, which are worth checking out if this applies to you.

Every individual in the UK gets an annual capital gains tax exemption. It’s also known as the Annual Exempt Amount. This is the amount of gains you can make in a tax year before you owe any CGT at all. For both the 2025/2026 and 2026/2027 tax years, the Annual Exempt Amount is £3,000.

Note: It’s worth knowing that the Annual Exempt Amount has been reduced in recent years. For context, it was £12,300 in 2022/2023 — quite a large reduction!

The allowance resets every tax year and can’t be carried forward. 

In summary: if your total gains in a year are below this threshold, you won’t owe any capital gains tax. If they’re above it, you’ll pay tax on the amount over the threshold.

The rate of capital gains tax you pay depends on two things: 

1. The type of asset you’ve sold
2. Whether the gain, when added to your income, falls within the basic rate or higher rate tax band

So, what are the capital gains tax rates for 2025/2026? We’re glad you asked:

• Basic rate taxpayers: 18% on residential property gains, 18% on other assets
• Higher or additional rate taxpayers: 24% on residential property gains, 24% on other assets
• Business Asset Disposal Relief: 14% on qualifying business assets 

If you are selling your business, you likely qualify for Business Asset Disposal Relief (this used to be called Entrepreneurs’ Relief). This is one of the biggest tax breaks for directors, but the rates are changing:

• Before 6 April 2026: The rate is 14%
• On or after 6 April 2026: The rate increases to 18%

To work out which capital gains tax band applies to you, just add your total taxable income and your capital gain together. If the total exceeds the basic rate band (£50,270 for the 2025/2026 tax year), the portion above that threshold is taxed at the higher rate.

It’s always worth keeping an eye on these rates. They were updated in the autumn 2024 budget, and it looks like further changes are planned for the 2026/2027 tax year, so double–checking with HMRC (or an adviser) before you make any big decisions is always advisable. 

If you own shares, either personally or as part of your business, you might need to pay capital gains tax on those shares when you sell them. But not always. Let’s break it down.

You won’t pay CGT on:

• Shares held in a Stocks and Shares ISA,
• Shares you’ve acquired through certain employee share schemes (like EMI options). These have their own tax treatment

You will generally pay CGT on:

• Shares held outside of an ISA 
• Shares you hold personally in your own limited company (for example, if you sell those shares to a third party)
• Shares you hold in another company

To work out your gain on shares, you’ll need to calculate the difference between what you paid for them and what you sold them for. 

This can be a bit more involved than it sounds, because HMRC uses specific rules (like the section 104 pool rule) to calculate the average cost of shares you’ve bought over time. 

What’s the section 104 pool rule? This is HMRC’s method for calculating the cost of shares (or cryptoassets) by grouping identical assets into a single pool to find their average purchase price.

Instead of tracking each share you bought, HMRC blends the costs together. This means that, when you sell, you subtract this average cost from your sale price to determine your taxable capital gain. The GOV.UK guidance on working out your gain on shares offers further explanation if you’d like to understand the methodology a bit more.

For most sole traders and directors, capital gains tax probably won’t crop up that often. But when it does, knowing the basics means you won’t be caught off guard.

The key things to remember: 

• CGT applies to individuals (not companies)
• It only applies to the gain, not the full sale price
• Directors of limited companies deal with chargeable gains through their corporation tax return instead

For day–to–day business admin, keeping your finances organised throughout the year makes everything, including capital gains tax, much simpler to manage. 

Opening a dedicated business current account that keeps your personal and business finances separate is a great first step towards getting more organised — if you haven’t already, why not open one today?

In the meantime, remember, if you’re ever unsure about your tax responsibilities, it could be worth speaking to an accountant, even just for peace of mind. 

For more small business tips and guidance,  check out our resource hub. From tax to accounting, we’ve got you covered.

The amount of capital gains tax you pay depends on your income and the type of asset. For 2025/2026, the rates range from 14% (on qualifying business assets under Business Asset Disposal Relief) to 24% (on residential property or other assets for higher rate taxpayers). You’ll also benefit from the Annual Exempt Amount (currently £3,000) before any tax is due. 

The way you report and pay capital gains tax depends on the asset involved. For most assets, you’ll report the gain through your tax return (if you’re a sole trader or individual). If you’ve sold UK residential property, there’s an additional requirement: you must report the gain and pay any tax owed within 60 days of completion. For companies, chargeable gains are reported through the company tax return.

For residential property gains in 2025/2026, the capital gains tax rates are 18% for basic rate taxpayers and 24% for higher rate taxpayers. Your main home is usually exempt under Private Residence Relief, but other residential properties, like buy–to–let properties or second homes, will generally be subject to capital gains tax.