Home owners should not lose out on valuable tax breaks because
of the MPs' expenses scandal, an expert has suggested.
Simon Littlejohns, tax partner in the Birmingham office of PKF
Accountants & business advisers, urged against a "knee-jerk
reaction".
In particular, the practice of 'flipping' has brought the
reputation of politicians into disrepute. But the principle is a
perfectly legal piece of tax planning for any taxpayer with two
houses used as homes.
Mr Littlejohns explained: "Flipping, as it applies to MPs, means
moving the designation of a main residence between a constituency
home and London accommodation, which has been bought to enable them
to better perform their parliamentary duties at Westminster.
"But, as we have seen, MPs have seemingly exploited the system,
redecorated their houses - claiming from the public purse under the
Parliamentary expenses scheme - and then sold the renovated home
tax-free, before repeating the exercise with another second home.
And by flipping between homes they have been able to avoid capital
gains tax (CGT) on the sale."
He went on: "When all this emerged the public found it quite
reprehensible.
"But that is largely down to the use of the Parliamentary
expenses system, a privilege extended only to MPs, to fund
renovation works prior to sale.
"In fact any taxpayer who owns two houses should consider the
use to which the two houses are put and pursue any tax planning
opportunities open to them."
At the point of buying a second house, perhaps intended as a
holiday home, a taxpayer has two years to decide, or "elect" in the
tax jargon, which property is to be treated as their main residence
for CGT purposes.
The taxpayer can then vary that election within two years of any
change in ownership of their properties, in favour of any other
property they own - in effect, flipping.
Mr Littlejohns said: "Circumstances change - that rural idyll in
Cornwall may turn out to be a disaster, necessitating a return to
the Midlands. In such a case an election is sound common sense, and
good tax planning, rather than something which should not be
contemplated.
"A taxpayer needs to think about the whole package and consider
the use to which they are likely to put each of the two properties
in the future before making any elections.
"Alternatively, perhaps they are looking to trade up, say to a
better second home. This may be a good time to buy. The market has
bottomed out and a recovery may not be far away. Once again, an
election may be a sensible consideration."
Mr Littlejohns pointed out that the CGT rules say that where a
house has "at any time" ever been a taxpayer's main residence, then
the gain relating to the previous 36 months of ownership will be
free of tax when selling that home. This is to cater for
those situations where taxpayers are unable to sell a main
residence as quickly as they would like. With careful planning on
the acquisition and disposal of properties, CGT liabilities can be
minimised and sometimes avoided completely. If there are a lot of
changes, extra care will be needed to ensure that all will stand up
to any HMRC scrutiny.
Mr Littlejohns stresses that there must be no artificiality with
the arrangements; the houses concerned must actually be used as
main residence for the relief to be available. As with all areas of
tax compliance HMRC may check the facts to ensure that all is above
board. There have been a number of cases decided against taxpayers
seeking to abuse the rules. So very careful thought and planning is
needed before any elections are made.
Mr Littlejohns said: "What MPs have done may be viewed as
shameful, but that is because they have taken advantage of the
Parliamentary expenses system to do up homes and then sell them
without paying capital gains tax.
"For everyone else, paying to do up a home out of taxed income,
there is nothing wrong with what is legitimate and sensible tax
planning."