Flipping second homes - what's the problem?

, We think the below article is a really interesting take on the flipping second homes issue, which we hope you will have space for in your magazine. We therefore very much look forward to hearing from you soon. Flipping second homes – what’s the problem? Property tax specialist Paul Windsor examines the tax legislation surrounding the alleged ‘tax dodge’ used by MP’s to mitigate Capital Gains Tax and questions the rights and wrongs of arranging our financial affairs within the letter of the law. Tax planning to minimise, mitigate or avoid a liability to the exchequer is a fundamental right of each and every taxpayer in the United Kingdom and is the basis of today’s multi-million pound tax industry. However it is in the middle ground of legality vs morality where our MP’s seem to have come rather unstuck – hence their pleas of not having done anything wrong. So what is all the fuss about? What is the so called tax dodge that MP’s have been using and is it available to you and me? It may be helpful to set the scene with some legal background. In 1929 Lord Clyde provided a clear judgement in which he said “No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores”. (Ayrshire Pullman Motor Services and Ritchie v. IRC (1929) 14 TC 754). A few years later Lord Tomlin reinforced this precedent “Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax”. (IRC v. Duke of Westminster (1936) 19 TC 490). These cases provide the foundation of today’s taxpayer’s rights. Lord Clyde even highlights the clear lack of moral obligation on behalf of a taxpayer. But have things moved on since the 1930’s? Well yes, of course they have. In the early 1980’s the important ‘Ramsay’ principle curtailed many artificial tax planning schemes that involved a pre-ordained series of transactions that had no commercial purpose, in this case a tax loss being created to offset a chargeable gain. This principle was extended further in the Furniss v Dawson case where it was eventually ruled that the insertion of steps into such a series of transactions for which there was no commercial purpose other than tax avoidance, should be disregarded for tax purposes. The most recent approach by HM Treasury has been to try and simplify the UK’s anti-avoidance legislation and in March 2008 they published a progress report on their anti-avoidance simplification review. The point is that there has been an ongoing tension between the taxpayer and the treasury over the principal that taxpayers should be able to arrange their affairs to minimise their liability to the treasury. ‘Flipping’ to save Capital Gains Tax. Flipping a home was a term generally regarded as something that taxpayers were able to do in periods of high demand for property. Buying a property in poor condition, doing it up while living in it and selling it on quickly for a substantial profit enabled the owner to gain the benefit of the generous principal private residence relief (PPR) from capital gains tax (CGT). MP’s are in a privileged position in that they are able to claim that a second home is required in order to carry out both their constituency and parliamentary duties. The more recent references to ‘flipping’ refer to the re-designation of these second homes as principle residences prior to selling them, thus enabling MP’s to benefit from the same generous PPR relief in these cases. The detail of the relief from CGT is contained in Taxation of Chargeable Gains Act (TCGA) 1992 S.222-S.226. The purpose of the relief is to enable a person to replace their existing home with another home of similar value by ensuring that the proceeds of sale of the old home are not diminished by a charge to Capital Gains Tax. If an individual has two or more residences within Section 222 he or she has the right under S.222 (5) to nominate which of these residences is to be treated as his or her main residence for any period. The main residence will attract relief for that period. Interestingly the Inland Revenue manual states that: ‘An individual is not obliged to nominate the dwelling house which is factually his or her main residence as the residence which is to attract relief. If the individual has more than one residence the relative extent to which each is occupied as a residence is not a material factor’. So really – what are we all complaining about – and wouldn’t you, given the opportunity, be flipping your second home to legitimately minimise a CGT liability? For advice on flipping your second home, contact Paul Windsor, specialist UK real estate tax advisor at WSM Property (www.wsmproperty.com) Contacts: Paul Windsor, WSM Property 020 8545 7606 paul.windsor@wsm.co.uk www.wsmproperty.com Lauren Alexander, Maltin PR 020 7887 1357 lauren@maltinpr.com www.maltinpr.com Notes to Editors: Paul is a regular commentator on property and finance trends, including taxation. Picture of Paul is available at www.maltinpr.com/paul-windsor Kind regards, Lauren Alexander Media Director Maltin PR Berkeley Square House Berkeley Square London W1J 6BD T +44(0)20 7887 1357 F +44(0)20 7887 6001 M +44(0)7515 664 338 www.maltinpr.com