Page last updated at 13:23 GMT, Friday, 19 June 2009 14:23 UK

Perfecting the art of "flipping"

Money Talk
By Ronnie Ludwig
Saffery Champness

Kitty Ussher's London home
Ms Ussher's main home in South London

Another day, another casualty of the MPs expenses scandal.

Junior Treasury minister and MP for Burnley, Kitty Ussher is the latest minister to resign as the expenses scandal continues to rage over Westminster.

Ms Ussher told the tax authorities that her Burnley home was her "principal residence" for a single month in 2007, thereby avoiding thousands of pounds worth of capital gains tax when it was sold.

She had previously told HMRC that a house in South London was her main residence.

This is the process we have now come to know as "flipping".

It means moving the designation of a principal residence between - in the case of MPs - a constituency home and London accommodation, which has been bought to perform parliamentary duties in Westminster.

Expenses

The aim of avoiding capital gains tax (CGT) tax on a subsequent sale may be a questionable practice in those elected to serve the people, but it need not be the public's biggest concern.

It is a tax planning tool that could prove highly advantageous

Of greater concern is that MPs have been able to redecorate their houses, claiming expenses from the public's purse under the parliamentary expenses scheme, and then sell them and make a tax-free gain.

They can then sell the renovated home tax-free and pocket the profits, before repeating the exercise with yet another second home.

MPs are perhaps more likely than many to have two properties with which to carry out the "flipping" exercise.

But it is important to understand that the question of MPs expenses and CGT "flipping" are two separate processes.

The first is a privilege extended only to MPs, whereas the second is available to any member of the general public who owns two houses.

How to do it

Under current UK legislation, the gain on the sale of your home which is your designated principal private residence (PPR), qualifies for relief from CGT.

Ronnie Ludwig
Ronnie Ludwig, Saffery Champness

For most people, this is simply their single main home.

But suppose you purchase a second property, say in a situation where a couple maintain a family home in the country, and a property in town near the office.

You then have a two year "window", from the date you buy the second home, to decide (or "elect" in the tax jargon) which property is to be treated as your PPR for CGT purposes.

This can be done simply by writing a letter to inform your tax inspector.

If you do not make this decision within the two year window, HM Revenue & Customs (HMRC) decides for you, based upon the facts.

It is vital to understand that under the current tax rules, providing you have made a PPR election within two years of acquiring a second home, you can then vary that election at any time, in favour of any other property.

Thus the way is opened for the "flipping" that some MPs carry out, and it is a tax planning tool that could prove highly advantageous.

Three years

Another feature of the tax system also kicks in, which gives home owners in this situation some retrospective tax benefit.

Using "home-flipping" as a tactic to avoid CGT is not... exclusive to MPs

The CGT rules say that where a house has "at any time" ever been your PPR, then the gain relating to the previous 36 months of ownership will be free of tax when selling that home.

Hence, you could nominate one property as your PPR, for instance your real main home.

You can then change the election of PPR to your second home, even for a little as one week, and sell that second home.

The profit relating to the last three years of ownership of the property would fall out of the CGT net when it was sold.

In addition, by quickly switching your PPR election back to the first home, you can ensure that it will enjoy near-complete CGT exemption when it is sold in future.

In the example above, the second home in London would enjoy a three year CGT exemption, for the loss of only one week of tax exemption on the family home in the country.

Some of that gain will be covered anyway by the annual CGT exemption which is available to any taxpayer in the year of sale.

The annual exemption is £10,100 per person in the current tax year, and if the property is held in joint names, double the amount of relief would be available.

But the "flipping" rules can provide much more exemption from tax.

Where MPs have the advantage

The possibility of using "home-flipping" as a tactic to avoid CGT is not, as we have seen, exclusive to MPs.

Kitty Ussher's Burnley home, now sold
Ms Ussher's constituency home, sold as as the principal private residence

Anyone who can afford to buy a second home, and who knows about the two year period in which to make the HMRC election, can also do it.

But there is another point on which MPs do differ from the rest of us, and that is their tax-free expenses.

Parliamentarians can claim taxpayer funds to repair or renovate their second flats and houses, often making major improvements.

This significantly raises the value of the properties when they are sold.

Kitty Ussher, for instance, had claimed £20,000 in renovations to her London home within a year of being elected.

On this occasion, it was not the London property that was sold.

Paying for improvements

But other MPs seem to have carried out extensive works, at the expense of the public, on the properties they subsequently sell for a significant tax-free profit.

The average taxpayer making improvements to their home would pay for any work out of their own taxed income.

And the value of their property on sale would be bumped up by the value of the improvements made.

The MP though can pay for the renovations and improvements out of the public purse, and then enjoy relief from CGT as well when it is sold.

This combination of CGT tax relief, and taxpayer funded renovations, can lead to a "double-jammy" in benefit.

Calls for the clean up of Britain's politics are now heard every day.

But it is important for the public to understand what reliefs are available to us all, and where the true inequalities between MPs, and the public that elected them, lie.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.



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