Hazel Blears and Gordon Brown - a genuine gesture or deliberately deceptive?

When it was fist reported that Hazel Blears had volunteered to pay 'back' the Capital Gains Tax (CGT) that she avoided through 'flipping' her main residence, I wondered whether she was simply naive, badly advised or deliberately deceptive.

According to the original Press Association report, Hazel denied that Gordon Brown had prompted her to resolve matters - which involves paying £13,332 CGT.

It's now been reported in the Independent that Gordon Brown did personally asked her to do this. In which case my question should be directed to the PM who was Chancellor for ten years. Whilst I wouldn't expect him (or anyone) to have full grip on all tax issues I would expect him to understand some basic points.

If someone, like Hazel Blears, voluntarily pays tax that HMRC's tax system is not expecting the money will be initially credited to her self assessment (SA) tax account. After a short while this will be checked and if no liability to tax is 'charged' to the account the 'overpayment' will be automatically refunded. Does she know this? Does Gordon know this?

For the computer to accept the monies as due they will need to be matched against a liability on Hazel's SA record. To create such a liability requires her to admit that her return was incorrectly completed, in which case interest will also be payable and possibly a penalty too. The return in question was filed under the old penalty regime so the unprompted(?) disclosure may justify a nil penalty, but nil interest too? I think not.

Or did Gordon tell Hazel that she can safely offer to send a cheque to HMRC safe in the knowledge that they will send it straight back?!

The only bit that seems odd here is that Gordon will certainly know that the taxman was renamed HMRC in 2005 so I'm sure he would have told Hazel to send the money to them. But I heard Hazel say she'd be sending a cheque to the "Inland Revenue".

Tax Advice Network on BBC - twice in two days

Not strictly TaxBuzz but arguably worthy of note. I was interviewed for BBC's Newsnight programme on Monday evening and subsequently appeared live on BBC's Working Lunch programme on Tuesday.

For Newsnight I think they filmed about 15 minutes of Q&As and broadcast just 15 seconds.
(It's around 19 minutes in if you're desperate to catch it on BBC iplayer for the next few days).

For Working Lunch my piece was somewhat longer - about 3 minutes of air time right at the start of the programme.

On both occasions I was asked to comment on Flipping properties - avoiding CGT when you have more than one main residence - partly on the back of the TaxBuzz blog comment I wrote on Sunday.

Newsnight simply used one sentence I said, in the context of the final 3 years deemed useage rule for property that has at some stage been your main residence: Looked at objectively one has to question whether the rule has remained in place and as generous as it is because so many MPs are able to benefit from it.
After all how many other people take 3 (or even 2 years as it was previously) to sell their old house after buying a new one?!

On Working Lunch the journalist explained the basic 3 year 'overlap' rule then Declan Curry (the presenter) asked me to explain the facility to elect which of two properties is your main residence. I also had to explain the rent a room scheme and the charge to CGT if you sell a rented property. So, not much to squeeze into 2 or 3 minutes of airtime!

Pension tax changes that hit high earners NOW

In his Budget the Chancellor talked about changes to the pension rules that would come into effect in two years time. He also mentioned, and the Finance Bill now contains, what are referred to as, anti-forestalling provisions. These restrictions were explained in BN 47 and apply to anyone:

• whose income is £150,000 or higher this year;
• who changes their normal, regular ongoing pension contributions; and
• whose total pension contributions are more than £20,000.

In practice these rules mean that higher rate tax relief is no longer available for many people earning more than £150,000 this year. In effect the new rules come into effect two years earlier than was announced.



It's the disingenuous nature of the announcements that get me. And if not disingenuous then ignorant. It's one or the other. And then there's the way that Ministers and top civil servants are unaffected. Coincidence? I fear not.

Inequity
The provisions are likely to affect far more taxpayers than those at which we are told they are targeted. For example anyone making ad-hoc pension contributions of more than £20,000 who:
• was made redundant and whose termination payments push them over the £150,000 income threshold for one year only; or who
• was approaching retirement and had deferred making effective pension contributions until they were older and more financially stable.

In both of these cases the reason for the increased pension contributions is nothing to do with trying to obtain relief at a higher rate than might be available in the future. Nevertheless if their contributions exceed £20,000 this year, they will not qualify for higher rate tax relief.

And then there are the self-employed who do not make regular pension contributions every month. They will also be disadvantaged if they continue to make their annual pension contribution only once they know what they can afford to pay. This is typically only the case after they produce their annual accounts. If they want to pay more than £20,000 in one go their tax relief will be restricted. This seems most unfair – but at least on this point the Government has agreed to listen to representations.

Ministers and civil servants are unaffected
It’s also worth noting that the new provisions favour those in final salary pension schemes, predominantly government and similar organisations. Few other employers can afford to provide final salary related pensions.

Under the new rules ministers and civil servants, for example, are only affected if their benefits increase as a result of changes in accrual rates or pension scheme rules. Increases in salary alone will not bring these individuals within the anti-forestalling provisions.

Compare this with anyone in an employer’s money purchase pension scheme. They could lose tax relief immediately on additional contributions which arise only by reason of a pay increase.

What do you think? Disingenuous? Unfair? Reasonable? Fair? Please add your comments to this post below.

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?

Stopping the duff accountants and 'tax agents' spoiling it for the rest

HMRC published a new consultation document last week - the latest in a series under the heading 'Modernising Powers, Deterrents and Safeguards'

The document is titled 'Working with Tax Agents' and it explores how HMRC interacts with 'tax agents' - a phrase said to include "accountants, solicitors, payroll bureaux, specialist advisers and VAT specialists." The main target of any changes that follow are intended to focus on the small number within the tax agent community whose work falls below a professional standard.

The consultation is intended to raise issues and ask questions rather than propose definitive solutions. It contains assurances as regards "the reinvigoration of regular 'working Together' meetings between groups of local tax agents and HMRC staff".

I've no doubt there will be cynics who will doubt the sincerity of some of the aspirations set out in the document. In my view however I think the message has finally got home. Accountants and tax advisers are a critical element in making our tax system operate effectively. This is something that representatives of the main professional bodies have been trying to bang home for some years now. I recall Ian Hayes, my predecessor as Chairman of the ICAEW Tax Faculty, telling us how he had been stressing this point at every opportunity some years back. And many of us have repeated it more recently.

Simply stated, with ever reduced internal resources, HMRC need to be able to rely on the work done by reputable accountants and tax advisers. If you are in practice you have a choice. You can either help your clients to fulfil their legal obligations and do so in a professional manner, or you can (deliberately or otherwise) keep your clients' tax bills to a minimum through dubious means whilst hoping that HMRC's stretched resources will not catch up with you or your clients.

Now is not the time for cynics to dismiss this invitation to contribute to the debate. I think it's a once in a lifetime opportunity to contribute to HMRC's plans to enhance its relationship with accountants and tax advisers. This invitation is a direct result of the efforts made by many in the professional bodies over many years of debate and discussion with HMRC.

The Tax Advice Network will be formulating a response and welcomes contributions from 'tax agents' who have considered views but do not intend to respond to the conultation themselves.

Do please add your comments to this blog post or email us through the feedback facility on our website.