Over the recent past, there cannot be a single person who has not heard about MPs ‘flipping’ their homes in order to gain benefits, including lower tax bills upon sale of their properties.
Apart from the shape of the political landscape changing, one of the consequences of these revelations could be that the rules on nominating which property is an individual’s main residence are tightened up.
This is a little bizarre as it will be the Government, and therefore MPs, who will introduce these changes to block the loophole that has been used by MPs to such great effect.
It will be interesting to see the queue of turkeys lined up to cast their votes in favour of Christmas!
It’s going to be a great shame if these rules do disappear, or change substantially, as many members of the normal tax-paying public will ultimately end up suffering.
The MPs’ expenses, claimed so that the rest of the taxpaying public end up covering the cost of home renovations, swimming pool maintenance and the well publicised duck house really shouldn’t have ever been allowed and must never be allowed to happen again.
So, how do the current tax rules actually work?
It’s pretty simple really. If you own two homes, as many do, and they can both be used by you as your main residence, all you need to do is nominate the ‘other home’ as your main residence for even a relatively short time.
What this then means is that you will get the benefit of this house being treated as your main home for an additional three years.
Here’s an example of how this works in practice:
William owns a house in Stratford which he has elected as his main residence but also has a Welsh cottage he has owned for five years and now wants to sell in six months time, and which has gone up in value from £150,000 to £200,000 in that time. Without planning William could find himself facing a tax bill of up to £9,000.
However, if William altered the election in favour of the cottage even for the next six months and then flipped back to his Stratford property, for that six month period the cottage will be regarded as his main home and will therefore qualify for the three-year relief. This means that instead of having a tax liability on £50,000, £31,818 will drop out of account, leaving William with a chargeable capital gain of £18,182, and a maximum tax bill of £3,272. The minimum tax bill could be nil, dependent on his personal circumstances.
At present the rules state that when William sells the Stratford home, he loses the tax relief on it, but only for the period he flipped it – in this case, 6 months. However, the gain reflecting this period of ownership could be covered by his annual Capital Gains Tax exemption for the year in which he sells, meaning he has no tax to pay.
Another quirk of the current rules is that you do not have to actually spend most of your time in your main home. You only have to actually use it as a residence and have proof of this fact.
Anyone with two homes should seek advice from their financial planner and tax adviser on their own position, in order to take advantage of the rules that currently exist for all; they’re not just there for MPs!!