CGT on homes – you, too, can be a flipping trougher

With the line up of our supposed tax avoiding MPs now including Blears, Hoon, Blinky and Perky, and many more besides, it has to be said that it is all now getting rather silly. Because whatever offences our troughing politicos may stand accused of, and be indicted for in due course, the avoidance of capital gains tax is not going to be one of them.

But, yet, the media and the collective bloke in the pub still persist in the nonsense of accusing MPs of avoiding CGT when the MPs have done nothing unlawful when it comes to their tax affairs.

The curious aspect of this misdirection is that people become so fixated with the perceived tax avoidance that they fail to step back and consider what exactly it is that the supposed tax is being avoided on. The complaint is that our MPs have failed to pay tax (which would be at not more than 40%) on a profit enjoyed on the sale of one, or more, properties.

But, let us put it a different way around. Public officials have been using public money to make a very handsome profit, but yet then only offer to give 40% of that profit back to the public. Expressing it without the emotive tax word, it does not take long for the penny to drop, with our bloke in the pub quite rightly no longer wanting just 40% of the profit but, rather, wanting 100% of it.

The secondary question, and the one which, in a more measured world, would be the one now worthy of the most attention, is how have our troughing politicos have managed to find the time to be committed property investors ? Are these people not meant to have a full time and (according to them) demanding job involving the proposal, debate and enactment of legislation ? Regrettably, for the rest of us, one suspects the answer is not difficult to find when we looks at the quality of the legislation enacted over the last 10 years, or so; being a time when parliament has just about effed up everything it has touched.

It is, therefore, noteworthy, that one of the very few areas of tax law which has survived recent governments without being touched, let alone hacked about until rendered unintelligible, is the capital gains tax rules for only or main homes.

These rules, which have, in no small way, played their part in creating the housing bubble, apply to all individuals (and some trustees) who enjoy a profit on the disposal of a property which has been used as an only, or main, residence. There are no different or special rules for MPs; except, that is, MPs can have the public purse to pay for the professional advice over how the rules work.

A residence is just that, and requires that a property has been used as a home in the ordinary meaning of the word. The property in question can be wholly or partly owned. Any property in which a legal estate is held (freehold, leasehold, tenancy, commonhold) is a property for these purposes; properties rented under licence do not count.

The capital gain enjoyed on the sale of a property used throughout its period of ownership as the owner’s only or main residence is exempted from CGT. This is the situation which applies to most people.

Where a property has been occupied, in fact, as a residence but not for its entire period of ownership, the property is, nevertheless, deemed to have been so used for its final 36 months of ownership. This extension of the exemption was designed to keep outside the tax system those home owners who may for, example, move to another property because of their jobs or family breakdown, and only then later sell the first property. During the early 1990s recession, in acknowledgement of the delays then being experienced by people in selling their properties in a moribund market, the original period of 24 months was increased to 36 months. This was, at the time, described as a temporary extension, but it has never been reversed.

For those of us lucky enough to have two, or more, properties which are both occupied, in fact, as a residence, the law, by default, requires that the property used as the person’s main residence is the property attracting the exemption.

However, multiple home owners can override the default treatment by electing which of their residences is to attract the exemption. The election to nominate any residence can be made within 2 years of a person first acquiring a second residence and, thereafter, can be changed again at anytime.  Provided the property is used, to some degree, as a residence, the extent to which it, or any other property, is so used is not a relevant factor.

To illustrate:

• Tommy Trougher MP has a constituency home.


• He purchases a property in the Westminster area, where the interest on a 95% mortgage on a typical two bed flat will be covered by the PAAE (ACA, second homes allowance).  Fancy that.


• He lives at the Westminster property for 3 days a week and nominates it as his main home for  the purposes of the CGT exemption.


• At this point, the CGT exemption no longer applies to his constituency home, but no fear.  A week later, he"flips" his election and, this time, nominates his constituency home as his main residence for CGT.


• The CGT exemption now applies to the profit on a sale of the Westminster property for the week in which it was nominated as Tommy Trougher’s main residence and, also, for the last 36 months of the ownership of the property.


• Within 3 years of acquiring the Westminster property, Tommy sells at a handsome profit.  All tax free and perfectly legit. Sweet.


• Tommy takes his tax free profit and uses it towards his next property purchase. 

So, the tax break is a legitimate one, no matter how generous or daft it might seem, and is available to all.  You can, therefore, do the same. But do not forget that whilst anyone can be a flipper, to be a flipping trougher you must also do the following:

1. Get elected to parliament.


2. Help yourself to £23K a year of the public’s money to pay for the mortgage on your new property.


3. Participate in a legislative agenda which causes a prolonged increase in property prices.


4. Hope that the ungrateful plebs do not notice when it's time for your re-election.  

Update: Alastair Darling, on the Politics Show 24 May 2009, has stated the above rules will be changed via an amendment to the current Finance Bill.  The reversal of the 36 month rule back to 24 months requires only a Treasury Order, and the extent of the changes will, therefore, presumably be wider reaching than that.