Capital Gains Tax and Your ISA: Why the £3,000 Allowance Cut Changes the Maths

If you hold shares, funds, or a second property outside an ISA, the amount of profit you can make before Capital Gains Tax (CGT) applies has shrunk dramatically in just a few years. For investors, this is one of the strongest arguments for using your ISA allowance in full - because everything inside an ISA is completely outside the CGT system.

How much the allowance has fallen

The annual CGT exemption - the amount of gains you can make each tax year before CGT applies - has been cut sharply:

• 2022/23: £12,300
• 2023/24: £6,000
• 2024/25 onwards (including 2026/27): £3,000

That’s a reduction of more than 75% in four tax years, with no indication the allowance will be increased or reintroduced at a higher level.

Rates have also gone up

On top of the shrinking allowance, the rates charged on gains above the exemption increased at the October 2024 Budget. For shares, funds, and most assets other than residential property:

• Basic-rate taxpayers: 18% (up from 10%)
• Higher and additional-rate taxpayers: 24% (up from 20%)

Residential property gains (other than your main home) are taxed at the same 18%/24% rates, having been aligned with the rates on other assets.

A worked example

Say you sell shares held outside an ISA for a £6,000 profit, and you’re a higher-rate taxpayer:

• The first £3,000 is covered by the annual exemption.
• The remaining £3,000 is taxed at 24% - a bill of £720.
• Under the old £12,300 allowance, this entire £6,000 gain would have been tax-free.

Why this makes your ISA allowance more valuable

None of this applies to gains made inside a Stocks & Shares ISA - they’re entirely free of Capital Gains Tax, regardless of size, for as long as the money stays wrapped. With the outside-ISA allowance now a fraction of what it was, and rates higher too, the gap between investing inside and outside an ISA has widened substantially in a short period.

What this means practically

• New investing: with a £20,000 ISA allowance available every tax year, there’s rarely a good reason to hold new investments outside an ISA unless you’ve already used your full allowance.
• Existing holdings outside an ISA: consider gradually using a process known as ‘Bed and ISA’ to move investments into your ISA over time, using your CGT exemption each year rather than triggering one large tax bill (see our separate article on how this works).
• Record-keeping matters more. With a smaller tax-free allowance, more investors are crossing the threshold for CGT reporting, even from relatively modest gains - keep records of purchase costs and dates for anything held outside an ISA.

The bottom line

A shrinking CGT allowance combined with higher rates means holding meaningful investments outside an ISA is now considerably more expensive than it was even three or four years ago. If you haven’t used this year’s £20,000 ISA allowance, that unused allowance is doing more work than it used to. If you’re a higher or additional-rate taxpayer, it’s worth pairing this with a check on your pension contributions too - many people don’t realise they have to actively claim the extra 20–25% pension tax relief they’re due rather than receiving it automatically.