UK MPs Expenses Scandal Casts Unwelcome Light On Second Home 'Flipping'

by Jason Gorringe, Tax-News.com, London

05 June 2009

The ongoing public outrage surrounding MPs’ second home expenses claims could have the unintended consequence of leading the government to withdraw a valuable capital gains tax concession for the wider public.

The MPs expenses controversy has highlighted the substantial tax advantages available from the ‘flipping’ of second homes, but these tax breaks are not exclusive to members of parliament and can be exploited by anyone who has a second home and the means to fund relatively short term property gains, according to accountants and business advisors James Cowper LLP.

“It has long been a premise of the UK tax system that an individual is allowed to buy and sell his or her home free of capital gains tax; gains are generated tax free to allow movement up the property ladder and the accumulation of equity,” says Sharon Bedford, a partner and tax expert at James Cowper. “For those with two homes, an individual can elect which home is their main residence in order to attract tax free status.”

Bedford points out that if flipping is combined with the ‘time to sell’ rules, which were introduced to help migration from economically depressed to more prosperous areas, significant tax breaks can result.

“Those who did have to move to secure a job often faced another problem,” Bedford observes. “The depressed housing markets in some areas of the country meant they could not sell their home for a considerable time and may have been faced with short term letting. It would have been a double whammy if this letting meant they also lost their tax free status, hence the ‘time to sell’ rules. The last three years of any period of ownership of a residence should qualify for tax free status.”

Bedford illustrates this rule by using the example of an MP, who, within two years of acquiring in London, elects that the family home in the country is their main residence, hence maintaining its tax free status. Before three years of ownership the flat is sold. An election can be made however to ‘flip’ the tax free relief to the flat, say a week before sale. A week later it is ‘flipped’ back to the country home. Although the flat has only been the main residence for one week, the ‘time to sell’ rules kick in and the whole period of ownership of the flat acquires tax free status.

“Of course much of the current controversy arises because some MPs are arguably doubly advantaged,” Bedford notes. “Not only have they benefited from the tax free gains, but the purchase or refurbishment of the London home has been funded by the taxpayer.”

But now that ‘flipping’ MPs have made the headlines Bedford says that it is difficult to envisage how “a government which constantly calls for a fair and equal tax system can allow this to continue.”

“We would hope that there is not a panic reaction to the headlines and that any changes to the tax law are well thought through,” she says. “Amending the three year ‘time to sell’ rule would stop the tax breaks from the ‘flipping’ of second homes but would seriously disadvantage those who in the current downturn really do have to “get on their bike” and in the current housing market are unable to find a buyer for their home.”

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