Among last year’s outraged headlines concerning MP expenses there was outcry over MP’s ‘flipping’ their homes to avoid paying tax. This is where MPs told HM Revenue & Customs (HMRC) that a second home was, in fact, their main residence, to avoid capital gains tax (CGT). While you might not like to hear this, the MPs actually did nothing illegal, immoral maybe. However, the good news is that if you have a second home you want to sell you can do the same and save tens (or hundreds) of thousands of pounds in tax - the wealthy and the well advised have been doing it for years.
Ordinarily if you were to sell a property any profit which you make is liable to CGT (currently at a rate of 18% for basic rate tax payers and 28% for higher rate income tax payers). However, you do not pay capital gains tax on the sale of your principal residence i.e. where you live – this is known as Private Residence Relief. If you did then every time you moved home you’d be landed with a huge tax bill. Obviously, if you only own one house and live in it then this is your principal residence. But if someone has a second home or an investment property they can actually choose which is their principal residence and notify HMRC accordingly. You have to actually live in your nominated principal residence to qualify for Private Residence Relief otherwise the tax man will be after you. But if you nominate a second property as your principal residence just before you sell it, you avoid capital gains tax on the proportion of any gain assumed to relate to the period of time after you told the HM Revenue & Customs of the change in your main residence.
So that seems fair enough, but what did the MPs do to save tax?
There are all sorts of other HMRC rules which determine the amount of tax relief you receive on a property sale given certain scenarios such as working abroad, time between purchase and moving in, periods of inoccupation etc. But there is one rule which was created during the early 1980’s recession to aid people forced to move away in order to find work, but who were unable to sell their original home due to a depressed property market. It would have been unfair to make these reluctant landlords pay CGT on the period of time when they were having to rent out their old home through no choice of their own. A rule was introduced (often called the ‘’time to sell rule’’) which meant that if someone else was renting your supposed main property, for tax purposes, the last three years of any period of ownership would be treated as though you were still living there, and thus still qualify for tax-free status. But there is nothing to stop people using this rule in a way other than the spirit with which it was originally intended.
Hopefully you can see how an MP who bought a house, on expenses, could nominate a second property as their principal residence for a period of time and then use the ‘’time to sell rule’’ to reduce their CGT bill. Plus, if the nomination was done within two years of buying the second property the nomination would be backdated to the property purchase date. The MP could even switch the principal residence back to their true home and as long as they sold the second property within three years of re-switching any gain would be completely free of CGT!!
There is nothing to stop you doing the same. It is a very simple piece of planning which could save you thousands and it’s not illegal. As ever I’m just providing you with the information and you should seek independent tax, legal or other form of advice if you think you could benefit from ‘’flipping’’ your home.