IMPORTANT: This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. Release Date: 22 May 2009

Briefings

Some MPs have been accused of avoiding capital gains tax on second home sales and making a tax-free profit at the taxpayer's expense.

"Members selling any property must be completely open with the tax authorities about whether they have claimed additional costs allowance on that property as a second home and are liable for capital gains tax."

So said the (now ex-) Speaker of the House of Commons on 19 May 2009.

The MPs concerned were claiming the valuable and well-known capital gains tax (CGT) main residence exemption.  This exemption applies to all properties occupied as an individual's main residence and enables that individual to sell the property free of tax even where it has increased in value hugely.

Where MPs like Hazel Blears have come unstuck is that they took the main residence exemption a step further.  They took advantage of a special set of rules which mean that the exemption can apply to more than one property at once.  This practice has been referred to as "flipping" by the media.  It allowed the MPs in question to avoid CGT on two or more properties at the same time by flipping between main residences for the purposes of the exemption.

The rules of flipping can provide a double (or even multiple) main residence exemption.  This allows for more than one property to receive the benefit of the exemption over a three-year period provided the owner makes an "election" to the Inland Revenue within certain time limits. 

Flipping is best explained by way of an example.  Take Maureen, an MP who owns and lives in a house in her constituency with her family and has done for many years.

When elected as MP, Maureen buys a flat in London with the help of her parliamentary allowances.

Shortly after buying the London flat, Maureen makes an election to the Inland Revenue that it is her main residence for CGT purposes. In other words, she flips. A month later she changes her mind and makes a further election that her constituency home is again to be treated as her main residence for CGT purposes. Her second flip.

Maureen then sells the London flat within three years of buying it, making a profit of £80,000 which is entirely exempt from CGT.  When she sells her constituency home in the future, any gain on that property will also be free of CGT, except for the one month covering the period of election in favour of the London flat.  This taxable one month period will be minimal as a proportion of the overall period of ownership and will almost certainly be covered by Maureen's CGT annual exemption. By flipping, she has therefore benefited from the main residence exemption for two properties at once.

Whether or not you think Maureen was acting within the spirit of the law, she was certainly acting within the letter of the law.  The rules of flipping can be used in many other factual scenarios where you own more than one property, and they can offer very significant tax-free gains.

If you own two or more properties, whether in the UK or abroad, and you are not an MP worried about your tax affairs and expense claims being publically exposed, you can potentially save large amounts of CGT on the sale of your properties if you take advice early enough.

For further information please contact:

Andrew Goldstone
+44 (0)20 7440 7205
andrew.goldstone@mishcon.com

Victoria Turner
+44 (0)20 7440 7430
victoria.turner@mishcon.com