Capital gains are the profits made when an asset such as shares, a fund or a second property is sold for more than it cost. The gain, not the total sale price, is what may be subject to capital gains tax.
In one line: Capital gains are the profit on selling an asset for more than its purchase price, and may be taxable.
How capital gains works
Capital gains tax is charged by HMRC on gains above the annual exempt amount, which is 3,000 GBP for 2026-27 (HMRC). Gains inside an ISA or pension are exempt, so the tax mainly affects assets held directly.
For example, shares bought for 10,000 GBP and sold for 15,000 GBP produce a 5,000 GBP gain. After the 3,000 GBP exemption, 2,000 GBP is taxable at the applicable rate.
Losses can be offset against gains in the same year or carried forward, reducing the taxable amount.
Capital gains vs dividends
Capital gains arise only when an asset is sold and crystallised, and are measured against the annual exempt amount. Dividends are income received while the asset is held and use the separate dividend allowance.
An investor can face both: income from dividends along the way and a gain when the holding is finally sold.
Primary source: GOV.UK: Capital Gains Tax