The practice of some MPs redecorating and then ‘flipping’ their second homes for their own profit has been one of the most noxious revelations of all those exposed in The Daily Telegraph’s scoop. Although taxpayers have no access to redecoration funds, the tax breaks incurred during this manoeuvre are not exclusive to MPs and, somewhat ironically, were introduced during the last recession. But with the spotlight on flipping, some tax experts are warning that this window will soon be closed.
In 1981, the then employment minister, Norman Tebbit, advised the millions of unemployed to ‘get on your bike’ and look for work elsewhere in the country. To encourage this, homeowners were allowed to maintain their property as their tax-exempt main residence, even if they’d moved away and let it out. The ‘time to sell’ rules stated that the last three years of any period of ownership of a residence should qualify for tax-free status.
Couples who each own a property but move into one of them after marrying also benefit from these rules: they then have three years in which to sell their second property tax-free. This is how it works: an MP (for example) owns a country house, designated as his principal private residence. He then buys a pied-à-terre in London. Less than three years later, he decides to sell the London flat. At this point, he elects to ‘flip’ the tax-free relief to the flat, say a week before sale.
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A week after the sale, it’s flipped back to the country house. 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. The country home does lose relief for one week, but this is likely to be insignificant in a long period of ownership.
Sharon Bedford at accountants James Cowper believes that these tax advantages are going to change. ‘It’s 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 (CGT); gains are generated tax-free to allow movement up the property ladder and the accumulation of equity. For individuals with two homes, they can elect which home is their main residence in order to attract tax-free status.’ Mrs Bedford adds: ‘Of course, much of the current controversy arises because some MPs are arguably doubly advantaged. Not only have they benefitted from the tax-free gains, but the purchase or refurbishment of the London home has been funded by the taxpayer.
‘Nevertheless, now that flipping has made the headlines, it’s difficult to see how a Government that constantly calls for a fair and equal tax system can allow this to continue. ‘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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