Capital Gains Tax Investigations: Practitioner Guide

HMRC receives full data on property and share disposals automatically. An undeclared capital gain is significantly more likely to be detected now than it was a decade ago. When HMRC opens a CGT enquiry, it typically already has a good picture of what occurred; the questions are the quantum of the gain, what reliefs apply and whether the behaviour was deliberate.

What triggers a CGT investigation?

HMRC CGT investigations are triggered by three broad categories of intelligence:

Automatic data matching

HMRC receives disposal data from Land Registry (covering all property transactions in England and Wales, including the date, parties and consideration), from estate agents under the Money Laundering Regulations and from conveyancers. This data is fed into HMRC’s Connect system and cross-referenced against self-assessment returns. Where a disposal is identified but no corresponding CGT entry appears on a return, a risk flag is generated automatically.

For share disposals, HMRC receives data from brokers and platforms and CREST data covers transfers of UK-listed securities. Unlisted share disposals are harder for HMRC to detect automatically, but corporate transactional data (Companies House, Stamp Duty returns) provides a secondary feed.

Lifestyle and income mismatch

Where Connect identifies that a taxpayer has made significant asset purchases (property, vehicles, investments) that cannot be funded from declared income, it generates a risk flag for investigation. The investigator will then consider whether undeclared gains or other income could explain the discrepancy.

Informants and third-party reports

HMRC operates a disclosure reporting line. Former spouses, business partners, employees and advisers have all reported CGT non-compliance. Informant intelligence is increasingly refined; HMRC tends to act on informant reports that are corroborated by data rather than pursuing allegations in isolation.

HMRC’s data sources for CGT

The breadth of data available to HMRC for CGT purposes has expanded substantially since 2014. Key data sources include:

• Land Registry: All property transactions in England and Wales since 2000 are digitally available to HMRC. The database includes buyer and seller identity, price paid and property address. HMRC can identify historical property ownership going back decades.
• Stamp Duty Land Tax returns: SDLT returns are submitted for most property transactions and provide detailed information about the transaction, the parties and the consideration.
• Common Reporting Standard (CRS): Over 100 countries automatically exchange financial account information with HMRC annually. This includes bank accounts, investment accounts and the market values of assets held offshore. Foreign property ownership may be reported by banks holding mortgages on those properties.
• Overseas property registers: HMRC has bilateral data-sharing arrangements with several jurisdictions, including Spain, France, Cyprus, Portugal and the UAE, covering property ownership by UK residents.
• Cryptoasset exchange data: UK-registered cryptoasset exchanges are required to report customer transaction data to HMRC. For CGT purposes, every disposal of a cryptoasset (including conversion to another cryptoasset) is a taxable event.
• Probate and inheritance data: Estates going through probate generate a disclosed asset schedule. HMRC checks the base cost claimed for assets acquired on death against the probate values.

Time limits: discovery assessments under s.29 TMA 1970

Where a taxpayer has failed to declare a capital gain, HMRC must issue a formal assessment to recover the tax. Outside the normal enquiry window (12 months from the filing date), HMRC’s primary tool is the discovery assessment under section 29, Taxes Management Act 1970.

The discovery conditions

HMRC can issue a discovery assessment where an officer “discovers” that a taxpayer’s assessment is or has become insufficient. The Supreme Court clarified the meaning of discovery in HMRC v Tooth [2021] UKSC 17: a discovery requires a new realisation by the officer that tax has been lost; it cannot be based on information HMRC already held and considered.

Critically, the discovery must be made by a human officer exercising judgment. Automated Connect flags do not constitute a discovery in themselves; the officer reviewing the flag must form a genuine view that tax has been lost.

Time limit: careless behaviour

Where the insufficient assessment was due to the taxpayer’s carelessness (including carelessness by their agent acting on their behalf), HMRC has six years from the end of the relevant tax year to issue the assessment (s.34 TMA 1970).

Time limit: deliberate behaviour

Where the loss of tax was brought about deliberately by the taxpayer, HMRC has 20 years from the end of the relevant tax year (s.36 TMA 1970). Deliberate behaviour was considered in HMRC v Tooth, where the Supreme Court held that “deliberate inaccuracy” requires intentional misstatement, not merely a foreseeable consequence of a legal arrangement.

Failure to notify

Where a gain made the taxpayer liable to file a self-assessment return (and they failed to notify HMRC of this obligation under s.7 TMA 1970), HMRC can also issue a failure-to-notify assessment. The time limit is 20 years regardless of whether the behaviour was deliberate (Schedule 41, Finance Act 2008). This is a separate track from the s.29 discovery power.

Outram v HMRC [2026]: deliberate conduct not established

The First-tier Tribunal’s decision in Outram v HMRC [2026] UKFTT 248 (TC) illustrates how the deliberate conduct threshold operates in the context of avoidance-based discovery assessments. The appellants had participated in Montpelier Group “Pendulum” arrangements intended to generate trading losses; it was conceded the arrangements were ineffective. HMRC argued that the appellants had deliberately brought about a loss of tax under s.36(1A) TMA 1970, triggering the 20-year window.

The Tribunal disagreed and allowed the appeals. It held that the appellants had genuinely relied on professional advice and had not understood that the steps necessary to establish a trade had not been taken. There was insufficient evidence of blind-eye knowledge or deliberate concealment. Without deliberate conduct being established, the 20-year extended time limit did not apply.

The case is directly relevant to CGT investigations involving historic disposals where HMRC seeks to invoke the 20-year window: even where an arrangement was technically ineffective, a taxpayer who genuinely relied on professional advice is not necessarily a deliberate defaulter. The burden remains on HMRC to prove deliberate conduct on the civil standard.

3KH Ltd [2025]: discovery assessments and dishonest conduct confirmed

By contrast, in 3KH Ltd and others v HMRC [2025] UKFTT 748 (TC), the Tribunal upheld discovery assessments (for both VAT and corporation tax), and associated penalties including PLNs, on the basis that the directors had acted dishonestly in suppressing sales and overclaiming input tax. The case confirms that where HMRC can establish a clear evidential picture of dishonest conduct, both the extended time limits and the higher penalty rates will apply. It reinforces the importance of constructing a strong factual defence at the earliest stage of any investigation.

The enquiry process

CGT enquiries typically follow one of two routes, depending on whether a return was filed:

Aspect enquiry under s.9A TMA 1970

Where a return was filed but the CGT position appears incorrect, HMRC opens a formal enquiry under s.9A TMA 1970. The enquiry must be opened within 12 months of the filing date. HMRC will issue a notice specifying the aspects being examined and may issue information notices under Schedule 36, Finance Act 2008, requiring production of documents.

Discovery assessment: no return filed

Where no return was filed (because the taxpayer did not appreciate they were liable to file or deliberately chose not to), HMRC proceeds by discovery assessment under s.29. This is accompanied by an information notice to obtain the documents needed to quantify the gain.

In both cases, HMRC will issue a formal Schedule 36 information notice if voluntary production of documents is refused or delayed. Failure to comply with a Schedule 36 notice without reasonable excuse attracts an initial £300 penalty and then daily penalties of up to £60 per day.

Quantifying the gain: common disputes

Once HMRC has established that a gain occurred, the quantum of the assessable gain is frequently in dispute. The most commonly contested elements are:

Acquisition cost and allowable expenditure

HMRC will seek to minimise the base cost, maximising the gain. Taxpayers should be prepared to document:

• Original purchase price (deed, completion statement, conveyancing file)
• Enhancement expenditure: capital improvements to a property (conservatories, extensions, new roof) are allowable; repairs and maintenance are not
• Acquisition costs (legal fees, Stamp Duty): allowable
• Disposal costs (estate agent fees, legal fees): allowable
• For pre-1982 assets: the option to use the 31 March 1982 market value as base cost (rebasing election)

Connected party transactions

HMRC scrutinises disposals between connected parties (spouses, family members, close business associates) where the consideration may have been below market value. Under s.18 TCGA 1992, connected party disposals are deemed to occur at market value regardless of the actual consideration paid.

Part disposals and development land

Partial disposals of land require an apportionment of the original base cost using the formula at s.42 TCGA 1992. Where land has been sold with development potential, the valuation of the land at the date of disposal and the apportionment of the original cost, are frequently disputed.

Reliefs and exemptions HMRC often overlooks

HMRC’s initial discovery assessment is often calculated on a worst-case basis, without allowing for reliefs the taxpayer is entitled to claim. A thorough review should consider:

Principal Private Residence (PPR) relief

Available on a property that was the taxpayer’s main residence for some or all of the ownership period (s.222 TCGA 1992). Even partial periods of residence attract partial relief. The final 9 months of ownership are always treated as a period of deemed occupation (reduced from 18 months in April 2020). PPR is one of the most frequently under-claimed reliefs in HMRC CGT investigations.

Business Asset Disposal Relief (BADR)

Formerly Entrepreneurs’ Relief, BADR provides a 10% CGT rate (against the current 24% rate for residential property gains and the basic rate/higher rate for other assets) on qualifying disposals of business assets, shares in trading companies and interests in partnerships. The lifetime limit is £1 million. Conditions include a 2-year qualifying period of ownership and activity. HMRC sometimes challenges whether the trading condition is met for mixed-activity businesses.

Rollover Relief (s.152 TCGA 1992)

Business assets replaced within 1 year before to 3 years after the disposal can qualify for rollover relief, deferring the gain until the replacement asset is eventually disposed of. Where the replacement was made at the time but the return was not completed correctly, rollover relief can still be claimed by amendment or in the enquiry.

Gift Relief (s.165 TCGA 1992)

Gifts of business assets and gifts to individuals on which Inheritance Tax is chargeable can qualify for holdover relief, deferring the gain until the recipient disposes of the asset. Where a gift was made without advice and no election was made at the time, it may not be too late to rectify the position if the gain has not yet been assessed.

Offshore CGT: enhanced powers and data

Offshore capital gains attract additional HMRC powers and penalty exposure. The Finance Act 2015 introduced an extended assessing time limit of 12 years for offshore matters where careless behaviour is involved (rather than the standard 6 years), and the 20-year limit applies for deliberate offshore non-compliance. Where the underlying territory was categorised as “Category 3” under the pre-2021 offshore penalty regime, penalty rates extended to 200% of the unpaid tax.

From 2021, the new post-BEPS offshore penalty rules maintain enhanced rates for territories that do not have automatic exchange of information arrangements with the UK. In practice, most major financial centres now have CRS arrangements, but some offshore jurisdictions (and arrangements that route through non-CRS territories) still attract enhanced penalties.

HMRC’s Worldwide Disclosure Facility provides a route for voluntary disclosure of offshore CGT. Where an offshore gain has not been declared, early voluntary disclosure reduces penalty exposure significantly compared to a prompted investigation.

The 30-day CGT reporting regime

Since April 2020, taxpayers disposing of UK residential property must report the gain and make a payment on account of CGT within 60 days of completion (extended from 30 days for completions after 27 October 2021). Non-UK residents must report all UK property disposals within 60 days regardless of whether a gain arises.

Late reporting attracts automatic penalties (similar to self-assessment late filing penalties), and interest on the late payment. HMRC actively monitors Land Registry data and issues penalty notices to those who have not filed within the required period. These penalty notices are increasing in volume and can be challenged on reasonable excuse grounds where the taxpayer was unaware of the regime or received incorrect professional advice.

Penalty exposure and mitigation

Penalties for undeclared CGT fall within the Schedule 24 Finance Act 2007 framework. The key penalty ranges are:

Reductions within these ranges are available for the quality of disclosure: telling (volunteering information), helping (providing documents and explanations without being asked), and giving access (attending meetings and answering questions). A compliant approach throughout can reduce the penalty to the minimum of the range. An uncooperative approach can result in penalties at the maximum.

Suspension of careless penalties (deferring the penalty for up to 2 years provided the taxpayer meets agreed compliance conditions) is available under paragraph 14, Schedule 24. It is worth requesting in appropriate cases and is often overlooked by taxpayers without specialist representation.

When CGT investigations escalate to COP9

A CGT enquiry that uncovers evidence of deliberate concealment may be escalated to HMRC’s Fraud Investigation Service and reopened as a Code of Practice 9 (COP9) investigation. Escalation is more likely where:

• Multiple undeclared disposals are identified across several years
• Evidence of active concealment is found (offshore structures, nominee ownership, falsified completion statements)
• The cumulative tax at stake is substantial (HMRC’s internal threshold for COP9 is generally in excess of £75,000 of tax at risk, though lower-value cases with strong evidence of fraud are also referred)
• The taxpayer has already been the subject of a prior CGT or income tax enquiry and the same behaviour has continued

Where escalation appears possible, early voluntary disclosure through the Contractual Disclosure Facility is generally the lowest-risk route. A COP9 investigation following an uncooperative enquiry carries the highest penalty exposure and, potentially, criminal investigation.

Voluntary disclosure before HMRC acts

Where a taxpayer has undeclared CGT and HMRC has not yet made contact, voluntary disclosure through the relevant HMRC facility is strongly advisable. Options include:

• Self-assessment amendment: Where the relevant return is within the amendment window (usually 12 months from the filing deadline), the return can be amended. Late penalties may apply but the disclosure is treated as unprompted, attracting the lowest penalty ranges.
• HMRC’s online disclosure service: For periods outside the amendment window, HMRC’s digital disclosure service provides a route to voluntary disclosure. This is treated as unprompted if HMRC has not yet contacted the taxpayer.
• Worldwide Disclosure Facility: For offshore CGT, the Worldwide Disclosure Facility is the appropriate route.

In all cases, the penalty position is significantly better for an unprompted voluntary disclosure than for a disclosure made only after HMRC has opened an investigation.

How we help

CGT investigation work requires specialist knowledge of the TCGA 1992, the Schedule 24 penalty framework, HMRC’s investigation procedures and the valuation principles applicable to property and share disposals. Our team handles the full range of CGT investigation work: enquiry responses, discovery assessment challenges (including staleness and deliberate inaccuracy arguments under Tooth), relief claims, penalty negotiations and voluntary disclosures.

Where a CGT investigation involves offshore elements, cryptoasset disposals or complex corporate structures, we draw on our network of specialist valuers and tax counsel to ensure the strongest available case is presented.