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Capital Gains Tax (CGT) is a tax on the profit made when you sell or dispose of an asset that has increased in value. While many individuals and businesses handle their CGT obligations correctly, discrepancies can sometimes arise, prompting HMRC to initiate an investigation. This article explores what Capital Gains Tax investigations entail, why they occur, and how you can protect yourself if HMRC raises concerns about your tax affairs.
What is a Capital Gains Tax Investigation?
A Capital Gains Tax investigation is an inquiry conducted by HMRC to ensure that all CGT obligations have been met correctly. HMRC scrutinises the sale or disposal of assets, such as property, shares, or valuable personal possessions, to confirm that the correct amount of tax has been declared and paid.
An investigation can range from a simple compliance check to an in-depth inquiry if serious discrepancies are identified.
Why Does HMRC Launch CGT Investigations?
Several triggers can prompt an HMRC investigation into your Capital Gains Tax:
Omissions or Errors in Tax Returns - Incorrect or incomplete reporting of gains can raise red flags for HMRC.
Unreported Asset Disposals - HMRC may cross-reference its data with sources such as the Land Registry or financial institutions. Failing to declare the disposal of assets, like property, can result in an investigation.
Significant Gains Without Reported Tax - If HMRC identifies substantial profits from asset sales without corresponding tax declarations, it may open an inquiry.
Anonymous Tip-offs - HMRC occasionally receives information suggesting undeclared gains.
Participation in Tax Avoidance Schemes - Use of aggressive tax avoidance strategies or offshore assets can attract HMRC’s attention.
How Does a CGT Investigation Work?
1. Notification
HMRC will notify you in writing if they decide to investigate your Capital Gains Tax affairs. This letter will typically include details about the scope of the inquiry and the specific tax year(s) under review.
2. Initial Information Request
You may be asked to provide supporting documentation, such as:
Records of asset purchases and sales
Valuation reports
Legal contracts or agreements
Evidence of improvement costs
3. Review and Follow-Up
HMRC will analyse the information provided and may request additional clarification. If discrepancies are found, they will outline their findings and propose corrective measures.
4. Resolution
The investigation concludes once all discrepancies are resolved. Outcomes can include:
Recalculated tax liabilities
Penalties for underpayment or non-disclosure
In severe cases, legal action
What to Do If You’re Under Investigation
If HMRC initiates a CGT investigation:
Respond Promptly: Acknowledge HMRC’s communication and comply with their requests.
Seek Expert Assistance: Engage a tax specialist to guide you through the process.
Provide Honest Information: Deliberately withholding information can worsen your situation.
At Tax Dispute Experts, we specialise in helping individuals and businesses navigate Capital Gains Tax investigations. Our team can assist with preparing documentation, negotiating with HMRC, and minimising penalties.