Sunday, May 10, 2009

Flipping properties - avoiding CGT when you have more than one main residence

Part of the row over MP's expenses relates to the way that they can 'flip' (or revise) their choice as to which of 2 or more properties is their main residence. Today the media is focusing on Hazel Blears, but it's likely that many other MPs have done the same thing.

I have no sympathy at all with ministers or other MPs who have been playing the system and claiming all that they could 'within the rules'. That the rules need reform is now beyond doubt.

I raised the question on this blog back in February 2008: Is it one rule for MPs and another rule for the rest of us? I was concerned about the apparent double standards that applied when it comes to tax planning. I noted that, in the context of the then brewing concern over MPs and their expenses:
There is rarely any suggestion that anyone has broken the law. No. They have simply looked to secure the maximum reward for their efforts within the strict wording of the rules.

Those involved have adopted a literal and precise approach to interpreting the rules. Not a purposive approach.
I was drawing an analogy with attitudes to tax rules where there is increased debate as to the distinction between acceptable and abusive tax avoidance (both approaches being legal and within the rules).

It's certainly the case that many people 'play the system' in the context of CGT if they own more than one property. The tax rules permit such choices to be made and revised. And good advice as to what can be achieved through timely and carefully made elections can save taxpayers large amounts of CGT.

The general position
Most people know that they do not pay Capital Gains Tax (“CGT”) when they sell their home. This is because the profit or gain you make when you sell your main residence is automatically free of tax.

If you own more than property however you are allowed to 'elect' which of them should be treated as your main residence for tax purposes. HMRC explain their interpretation of the rules for people who own more than one property in help sheet 283 "Private residence relief".
Only or main residence
If you live in, as your home, two or more houses, you can only have one main residence at a time for private residence relief.

You can nominate which residence is to be treated as your main residence for any period. Your nomination must be made within two years of the date you first have a particular combination of residences. If there is a change in your combination of residences, a new two-year period begins. If you do not make a nomination, the question of which is your main residence will be determined on the facts. (My emphasis)

This rule becomes even more valuable when it is combined with another relief relating to private residences. This is the general rule that often treats the gain on disposal of a property as exempt from tax even if it ceased to be your main residence upto 3 years ago.

This is a pragmatic rule that effectively allows you to keep the entire profit on sale of your house even if it takes you upto 3 years to sell it after you move into a new home. In such cases both of your homes qualify for the main residence relief during that 3 year period.

Have MP's been advised to exploit this rule - just as ordinary taxpayers may have done in the past? Probably. Does the basic rule exist for good reason? Yes, although there is scope to abuse it. And here we come back to the question of whether that makes it fair game?


  1. Of course they have been advised to take advantage. The tangential but, possibly more interesting issue in the present climate, is why the rules in their current form have been so lax for so long. When commenting on this previously (particularly in the context of the 3 years not being reduced back to 2 when the original extension to 3 was obstensibly only made for the duration of the early 1990s recession) I have suggested that it is because of incompetence on the part of government. On now seeing the vast extent to which the MPs have been taking advantage I would now venture that it was not incompetence but, rather, self interest which has inspired the lethargy in monitoring the tax system.

  2. I can feel another Artic Systems coming on...

    Not sure how much it is in the public domain but I do remember a few years back Malcolm Gunn "confessed" a fear at a CIOT meeting that it was he who started the whole Artic shebang by writing an obscure article about the application of the settlement provisions to husbands and wives. A "bright spark" at Claims Branch, as was then, read it in Taxation and took a case.

    Be careful what you wish for or some such.....

    My guess is there may be HMRC guidance released as to what constitutes a residence for the purpose of the PPR rules.