Tuesday, 12 May 2009

Property flipping and knee jerk reactions

I must admit that the publicity about some Members of Parliament with two or more residences changing their designated main residence to one they are about to sell has me a little concerned because of all the publicity around it, and because of the public's ire. The principal residence capital gains exemption is there for good reason, and whilst as with any rule it might be possible to exploit it to one's advantage, the main purpose of electing as to which is the main residence is actually to prevent hardship or difficulty. Often people acquire a second property through the necessity, perhaps related to a job or through inheritance, and electing as to which property is the main residence avoids unnecessary debate with HM Revenue & Customs at a later date. If a large family home were to be treated inadvertently as the second property, then upon moving, a large tax bill might prevent the purchase of a suitable replacement with similar and adequate accommodation. There has to be a rule determining which property attracts the exemption. Of course the system might be manipulated, but it is not a “loophole” as many commentators have described it.

If it is thought that MPs or ordinary taxpayers are taking serious liberties with what amounts to serial property dealing, then HMRC can look at the background and might believe that they are participating in an “adventure in the nature of a trade”, the profits of which would be liable to income tax, so it is not sensible or true to say that the tax man or tax woman does not have some powers to clamp down. With all the publicity MPs have received, those who have abused the system more seriously may certainly expect to receive letters from HMRC, who read the newspapers like anyone else. I should be concerned if there were some sort of knee-jerk clampdown emanating from Gordon Brown or Alistair Darling which might catch and be unfair to the innocent taxpayer.

Any system can be used or exploited. Readers of this piece might be interested to read about the late Frankie Howerd's ex-partner using the new Civil Partnership legislation to avoid Inheritance Tax and pass his estate tax free to their “son”. It is very ingenious, but just because rules can be exploited and manipulated by the clever or even the unscrupulous does not mean that they are wrong in principal or have to be scrapped in favour of some onerous and unfair regime which is detrimental to the greater “innocent” population.

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