In the case of The Personal Representatives of Mukesh Sehgal and Promila Sehgal v The Commissioners for His Majesty's Revenue & Customs [2026], the taxpayers lost their appeal against capital gains tax (CGT) liabilities of £4.9 million and £1.3 million respectively which arose from disposals made by them of loan notes. Alongside these liabilities, HMRC had sought penalties, calculated at 25% of the tax underdeclared for negligent delivery of relevant tax returns. On this, HMRC lost.
The taxpayers sold their shares in an English limited company for a mixture of cash and loan notes (in VGL - an English limited company). At or shortly after the issue of the loan notes, a formal hard copy register of the loan notes was created on behalf of VGL by its solicitors.
Prior to redemption of the loan notes, which would have given rise to a liability to CGT for each of the taxpayers, the taxpayers implemented planning which saw the loan notes transferred by VGL to a Jersey company (ML). The taxpayers had been told by the accountants responsible for the planning that this proposal should ensure that the notes were assets held outside of the UK and as the taxpayers were both non-UK domicile, the redemption of the notes would not be subject to UK CGT provided the proceeds were not remitted to the UK. No document (whether in electronic or hard copy form) was produced or maintained by any entity on behalf of ML which was identified as a register of the loan note holders.
The taxpayers failed to implement the tax planning correctly but did rely on the accountants that had designed the planning to draw up their relevant tax returns.
Section 12 Taxation of Chargeable Gains Act 1992 (TCGA) provided that, CGT would not be charged to individuals resident or ordinarily resident but not domiciled in the UK on gains accruing to them from the disposal of assets situated outside the UK, save to the extent that such gains were remitted to the UK.
Section 275(1)(c) TCGA provided that (subject to the other provisions within the subsection), a debt secured or unsecured, is situated in the UK if and only if the creditor is resident in the UK.
Section 275(1)(e) TCGA provided that registered debentures are situated where they are registered and, if registered in more than one register, where the principal register is situated.
The key question to the CGT liability was where were the loan notes situated at the time of their redemption.
Counsel for the taxpayers sought to argue that the loan notes were situated in Jersey for the purposes of section 12 TCGA at the time of their redemption. Despite no evidence of any register being produced to the First-tier Tribunal (FTT), the taxpayers submitted that a letter confirming a record of the identity of the loan note holders and the quantum of their respective holdings, maintained by or on behalf of ML's Jersey directors in Jersey as part of its accounts process, amounted to a register for these purposes. In the modern era, the taxpayers argued that the maintenance of a hard copy record was unnecessary and that an electronic record that was accessed and maintained by the Jersey directors of ML in Jersey was situated in Jersey.
The FTT disagreed. The FTT did not agree that the record referred to by the taxpayers constituted a "register". A "register” was something qualitatively different from a simple “record” (or even a collection of records). The words “register” connoted a degree of formality and specificity about the interlinked elements of (i) the information which is to be included, (ii) the formality of the way in which it is to be recorded and (iii) the intended purpose of recording it (which, in the FTT's view, should be so as to serve as a single identifiable formal point of reference to which recourse can be had in order to obtain an authoritative statement of the information recorded in it). Due to the lack of evidence, the FTT concluded that the loan notes were not registered in Jersey within section 275(1)(e) TCGA at the time of their redemption. They determined that the loan notes were either unregistered or, if they were registered, it was in the original register maintained on behalf of VGL in the UK. If the first, then since the taxpayers were both resident in the UK at that time, the loan notes instead fell within s 275(1)(c) TCGA; and if the second, then the loan notes were situated in the UK pursuant to s 275(1)(e) TCGA. In either case, the FTT dismissed the appeals and held that CGT was payable by the taxpayers on the redemption of the loan notes.
As regards penalties, Counsel for the taxpayer said that the “negligence” that HMRC had to establish was not negligence in failing to follow the accountants' advice, but negligence in delivering an incorrect return. The FTT agreed with this and confirmed that as the taxpayers had engaged reputable and competent advisers to give them advice on what steps to take, to supervise the implementation of those steps and then to draw up their returns in full knowledge of the steps that had been taken, HMRC would face an uphill battle in demonstrating that they had acted negligently in delivering the returns, even though they have ultimately turned out to be incorrect.
On the basis the steps to be taken in the reorganisation were not straightforward and involved instruction of overseas professionals and extensive and complex documentation, the FTT considered it unrealistic to expect the taxpayers to have overseen the details of all the steps themselves. Furthermore, the accountants' planning made no reference to the need for a new register to be created offshore by ML and therefore, even on a close reading of the planning documents, the taxpayers would not have been aware that the absence of this created a problem with the planning.
The FTT did not consider the taxpayers to have acted negligently by not seeking explicit confirmation from the accountants that all the transactions in the original planning had been implemented correctly before signing the returns that were drafted for them. The FTT determined that the taxpayers had acted reasonably in taking the view that the accountants in drawing up the returns were implicitly confirming that the transactions had all been carried through as originally intended. The FTT therefore set aside the penalties imposed by HMRC.
This case demonstrates the importance of undertaking planning correctly and seeking advice from competent and reputable advisers if penalties are to be avoided or at least mitigated.
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