Clegg’s ‘Flipping’ advice could hurt property owners, says accountants James Cowper
The ongoing controversy surrounding MPs expenses has highlighted the substantial tax advantages available from the ‘flipping’ of second homes. These tax breaks are not exclusive to MPs and can be exploited by anyone who has a second home and the means to fund relatively short term property gains.
Yet as accountants James Cowper warned in May this year, the actions of a few MPs has now called into question the validity of this tax advantage, with Nick Clegg, leader of the Lib Dems, calling today (14 October) for all MPs to repay capital gains tax benefit achieved from flipping homes.
Sharon Bedford, a partner and tax expert at James Cowper says: “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. For those with two homes, an individual can elect which home is their main residence in order to attract tax free status.
“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. Nick Clegg would be better to focus his attention on this advantage, rather than on the flipping of a second home.”
The ability to generate tax free income by ‘flipping’ relies on tax law which, somewhat ironically was extended in the last recession to help individuals forced to move home to find work.
“During the recession of the early 80s, Norman Tebbit suggested the unemployed may want to “get on their bike” and look for work, to encourage migration from depressed areas of the UK to more prosperous regions,” says Bedford.
“Those who did have to move to secure a job often faced another problem. 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.”
To take the example of an MP; within two years of acquiring the London flat he or she 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. The country home does loose relief for one week, but this is likely to be insignificant in a long period of ownership.
The ability to ‘flip’ ones main residence between two or more properties, whilst helpful, does not on its own result in a significant loss of tax revenues. However, if flipping is combined with the so called ‘time to sell’ rules significant tax breaks can result.
Bedford concludes: “Any hasty amendment to 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.”
Sharon Bedford, Partner, James Cowper LLP, Tel: 01865 200500 or email sbedford@jamescowper.co.uk
14.10.2009