Tuesday, June 1, 2010

CGT: Since when does an automatic relief constitute tax avoidance?

Poor old Danny Alexander. The papers are full of stories of how he "avoided CGT" on the disposal of a second home. The Telegraph accuses him of taking advantage of a 'loophole'. But a moment's examination suggests this is a non-story.

Did he seek advice about how to pay less CGT than would otherwise have been the case? No. Did he undertake some pre-packaged abusive avoidance scheme? No. Did he actually do anything other than sell his property? No.

After the inflammatory headlines most of the media stories then include a key fact. This is that the new Financial Secretary to the Treasury was legally able to take advantage of rules which exempt people from paying CGT for three years on their homes after buying a second property – on the condition that it used to be their main residence.

In fact these rules are set out as part of the 'private residence relief' from CGT and they apply in the same way to everyone who disposes of their main residence within 3 years of moving out.

HMRC's help sheet 283 states quite clearly:

Your period of ownership begins on the date you first acquired the dwellinghouse, or on 31 March 1982 if that is later. It ends when you dispose of it. The final 36 months of your period of ownership always qualify for relief, regardless of how you use the property in that time, as long as the dwelling-house has been your only or main residence at some point.

So, on what possible definition of the concept of 'tax avoidance' can it be said that Danny Alexander "avoided CGT"?

When I first addressed a related question last year (Flipping properties - avoiding CGT when you have more than one main residence) I noted that this is a pragmatic rule. It effectively allows you to keep the entire profit on sale of your main residence 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.


  1. Mark, I agree entirely. Doubtless before long we will have a shock horror expose of some MP engaging in heinous avoidance such as putting money into an ISA or even worse using his personal allowance to avoid paying on his first £6k of income. In fact these MPs are so dishonest - I expect most of them are at it!

  2. The Daily Telegraph is campaigning against the possible rise in CGT rates in the next budget.

    How can this campaign be taken seriously when they are so ill informed about the mechanics of CGT that they appear to believe that an automatic relief is a "loophole"?

  3. I agree, this really isn't very good!