Until the Daily Telegraph started publishing details about the details of what MPs claim most people were in the dark.
One of the things people ask me is how come they don’t get large tax bills on selling these second homes.
Indeed one minister — Hazel Blears — had to confirm that she did not pay capital gains tax (CGT) on her London flats, despite always living in Salford (a long way from London). More later.
The reason MPs, and others, can escape or reduce the dreaded CGT is the availability of what can be a generous tax relief.
Private Residence Relief is what stops us all paying tax when we sell our home for more than we paid.
If you only ever own one property and live in it, then HM Revenue & Customs does not even want to hear that you have made money on its sale. The gain is automatically covered by Private Residence Relief.
Where things get more complicated is where you own more than one property. Then a number of factors come into play:
1. Private Residence Relief on your main house.
2. Relief for the last three years of ownership even after it ceases to be home.
3. Ability to nominate which is your main residence.
4. Lettings relief for letting out what was once your home.
Private Residence Relief is available for the period the house was your main residence. Let’s say your parents put their house into your names 20 years ago.
Then 10 years ago you moved from your rented flat and moved in. If you now sell the house then you will have made a capital gain.
The house was your main residence for 10 out of 20 years so 50% of the gain is tax-free.
Swap things around and say that for the first 10 years you lived in the house and the last 10 you did not. You have 10 years as a main residence plus you are allowed to add in the last three years.
This means your private residence counts as 13 years out of 20. Thus your tax bill is worked out not on 10/20ths but on 7/20ths) less the annual exemption.
MPs and everyone else can submit a written election to HMRC if they live in more than one house. They nominate which house is to be their main residence.
This could be a different one from the one an MP tells Parliament is home.
So long as they use each as a base this is quite legitimate. HMRC can ask for proof of occupation — perhaps bank statements addressed there, phone bills etc.
The final relief can reduce your gains by up to £40,000 if you sell a property which was let out, and which was at a time was your main residence.
Add together the period you treated the house as your main residence, those last three years and the lettings relief and you can end up avoiding all or most of the CGT on your other home.
I looked up the personal website for the Secretary of State for Communities and Local Government — www.hazelblears.co.uk On it there is a recent “Statement on Parliamentary Allowances”. The exact page is at http://tinyurl.com/ ooshte
In this Ms Blears MP says how she used the Revenue rules on second properties and as such paid no CGT when she sold her London flats.
She then says that because of public feeling on the issue “I have therefore written a cheque to the Inland Revenue for the equivalent amount had I been liable for capital gains tax when I sold the flats.”
This is quite interesting because she states she had complied with the tax law back then.
Let’s just think what has happened. She uses the CGT rules to exempt the London flats from tax. Fair enough. She fills in her tax return accordingly.
Some years later she sends a cheque for £13,332 to HM Revenue & Customs (I am sure they can still cash a cheque even if she made it out to the old name Inland Revenue).
Unless she amends her old tax return, and she does not mention doing so, then HMRC will not have a CGT bill against which to set the tax.
They can’t just lodge the money and say thanks. So what they will do is allocate it to Hazel Blears’ self assessment account.
This means she will have a large credit on her account. That could simply be repaid by request (she can do it online) or used to pay her tax bills over the next few years.
I am afraid that unless Hazel Blears confirms she has now declared a 2005 capital gain on those flats to produce a CGT bill of over £13,000 then I, for one, will regard this as a cost-free gesture.
A temporary payment to HMRC which could even be repaid with interest.
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co — www.huston.co.uk or 028 9080 6080