The house of Ussher

KEY POINTS

• Property: why are we obsessed?
• What did Kitty Ussher do so wrong?
• Should one be able to change main residence designations?
• Does the three-year exemption still serve a purpose?
• Is it time to abolish the whole relief?

We all like horror stories don’t we. And horror films. In fact, I see that Christopher Lee is included in the Queen’s birthday honours.

As a recent letter to The Times said, ‘I always thought there was something of the knight about him’.

Talking of knights, I would imagine there are a fair number of these and others in parliament who think they are experiencing a horror story at the moment regarding their homes.

But all good scary stories have a sunny, happy, start, before things descend into unimaginable horrors, so here the screen goes all hazy and we turn the clock back to the 1990s. Property prices were rising and everyone was obsessed with getting on the housing ladder.

Here was a guaranteed way to get rich quick and there were plenty of television programmes and magazine articles telling you how to do it.

Property was our national obsession and we became a nation of ‘buy to letters’ with a love of ‘property porn’ and a good old gossip about how much the house down the road had sold for.

Home sweet pension plan

Then we all started to worry about our pensions. Generous tax reliefs were given for pension investments. Full relief on the initial investment, tax-free growth and income while invested and the ability to take 25% of the pension pot as a tax-free lump sum on retirement.

Unfortunately, one of the first acts of New Labour was the withdrawal of the ability of pension funds to reclaim the tax credit on dividend income.

Pension holidays taken by large employers and the failure of some large pension schemes and providers cast further doubts on the resilience of these products and doubts probably increased in the minds of many taxpayers as they surveyed the poor performance of their own pension investments as compared with the gold-plated schemes enjoyed by those employed by national and local government.

It was therefore hardly surprising that many started to see their property – or their second, third or subsequent properties – as their ‘pension plan’.

And with good reason: as Antonia Senior explained in The Times on 18 June, on the basis of average prices in the 1940s, the average price of a property today would be £43,000. Instead it is £153,000. Evidence, if it was needed, of the potential gains that were available.

Home sweet tax-free gain

As the gains that were to be made from investment in ‘bricks and mortar’ became more apparent, the possibilities of making that gain free of tax became even more attractive.

Basically, the exemption in TCGA 1992, s 222 is given to a taxpayer on ‘a dwelling-house or part of a dwelling-house which is, or has at any time in his period of ownership been, his only or main residence’.

This exemption dates back to the introduction of the tax on capital gains in FA 1965, although as most practitioners will be aware, TCGA 1992, s 224(3) does state that the relief may be lost or restricted where the taxpayer either acquired the property (or the interest therein), or subsequently incurred expenditure, ‘wholly or partly for the purpose of realising a gain on its disposal’.

I am racking my brain to think of someone I know who has purchased or improved a house in the last 20 or 30 years without having, at least in part, the intention of making a gain from it.

Perhaps we need to rethink our whole approach to this.

That this might be a very good time for a rethink is because the available tax exemption is now very newsworthy. Only last week, we heard that Kitty Ussher has had to resign over her use of the only or main residence exemption.

The Times reported her as saying that ‘at all times, my actions have been in line with HMRC guidance and based on the advice of a reputable firm of accountants’. Hold on, isn’t her husband Pete an accountant? You don’t think do you …?

Personally, I was wondering whether, like the rest of us, she had been encouraged in this by an over-indulgence in watching the television property programmes of Kirstie Allsopp.

And now I think of it, has anyone else noticed that Kitty Ussher seems to have more than a passing resemblance to our Kirstie.

Both born in the early 1970s, dark shoulder-length hair, similar facial structure, both seem to have a penchant for scarves. Wait a minute; both names begin with ‘K’. Have they ever been seen together? I think we should be told.

Timely transactions

But seriously, did Kirstie, I mean Kitty, do anything wrong? It doesn’t take a lot of imagination, or perhaps I should say – with the case of Kitty Ussher in mind – that it doesn’t take a tax adviser with a lot of imagination, to realise that there are quite attractive tax planning opportunities here. Especially for those who have owned a property for a relatively short period before selling.

Kitty’s circumstances may be a good example of the only or main residence tax exemption in action. We do not of course know the exact circumstances, but let us assume a sequence of events as follows.

• Sometime in 2000, a property is purchased in London.
• In February 2003, a property is rented in Burnley.
• In February 2004, a first property is purchased in Burnley.
• In May 2005, on election as an MP, it is decided that the London property should be her second residence for the purposes of the parliamentary allowance.
• Sometime in 2006, a second property is purchased in Burnley.
• In March 2007, the first Burnley property is sold.

Presumably, on the purchase of the first Burnley property an election was made that the Brixton property was to be the main residence. One might perhaps take this approach on the assumption that house prices in the capital were likely to rise at a faster rate than those in Lancashire.

As an aside, what seems to confuse the general public is that what is an MP’s ‘second residence’ for the purposes of claiming the additional costs allowance can, at the same time, be the ‘main residence’ for the purposes of the main residence exemption.

In late 2006, Kitty and her husband were presumably thinking of selling their first Burnley property which was now standing at a gain of just over £40,000.

As mentioned above, on the advice of her accountant, she elected that the Burnley property should be treated as her only or main residence for one month under s 222(5). As the period of ownership was only about three years, this meant that the whole of the gain was exempt from capital gains tax.

Change of residence

So should you be able to change the designation of your main residence? I would suggest that the answer, however much readers of The Daily Telegraph, the Daily Mail, et al, are not going to like it, is ‘yes’.

Many people may live some distance from their place of work and will purchase another property where they live for part of the week while at work, while perhaps spending weekends and other times in what they might term their family home.

Circumstances may change; they may lose their job and return to living in what was their weekend home, they may move jobs, buy another property and rent out one of the others.

What’s more, as shown in the Box above, HMRC’s own Capital Gains Tax Manual at CG64510 provides detailed advice on how to take advantage of the rules in the way that Kitty Ussher did.

One might therefore say, fine, we will have a rule that you can only change the designation of your main residence when specific circumstances occur.

But I would expect that people would then start to engineer specific circumstances or transfers to get around the problem.

If nothing else, the current expenses scandal and the propensity for ‘flipping’ properties shows just how inventive people can be when they have to work within certain rules.

Three-year rule

If we are going to allow flipping or changing the designation of main residence, should the three-year rule still be applicable?

As is common knowledge, the last three years of ownership of a property that has been, or has been designated as, the only or main residence is treated as exempt from capital gains tax.

This would avoid a gain where the taxpayer had moved – perhaps because he had to relocate jobs – but there was a delay in selling the old property. I suspect that the original intention was to prevent relatively small liabilities arising and consequent calculations having to be submitted just because the sale had been, perhaps unavoidably, delayed.

In principle, the relief seems totally acceptable. The problem is that since a substantial proportion of the population became property developers or ‘buy to letters’, the relief has become a useful means of obtaining tax-free capital.

Let’s say I buy a property for £100,000 and move in for a week, electing it as my only or main residence. I then let it out for six years and sell it for £200,000. I’ve made a gain of £100,000. The last three years’ worth is exempt under s 223(1).

But most of the gain also falls under s 223(4) so is ‘a gain only to the extent, if any, to which it exceeds whichever is the lesser of (a) the part of the gain which is not a chargeable gain by virtue of the provisions of [s 223(1)] and (b) £40,000’.

So £50,000 is exempt under s 223(1) and £40,000 is exempt under s 223(4), leaving £10,000 in charge which is conveniently covered by this year’s exempt amount of £10,100.

Of course, if I had made the sale last year the exempt amount was only £9,600 and on the basis that if I am unlikely to want to pay perhaps £160 in capital gains tax I might, shortly before the sale, transfer the property into the names of myself and my wife.

Tax avoidance, tax evasion or tax planning? Acceptable or unacceptable? And does it make any difference if you are a government minister, junior minister, shadow minister, employee of HMRC, professional adviser, television celebrity?

Answers on a postcard please because I am now totally confused as to who may take advantage of such planning (or avoidance or evasion depending on your point of view) and when.

I do wonder if the difficult position that MPs who have flipped property now find themselves in has been caused by the government itself. For many years now, either by accident or design, it and HMRC have been muddying the waters between tax avoidance and tax evasion.

We now have the odd situation where a person can lose their job as a result of taking advantage of a tax relief that is apparently sanctioned by HMRC.

Will I lose my job if I do the same thing? And what would happen if Kitty had perhaps bed and breakfasted (to the extent that one can) some shares or paid a pension premium to mitigate a higher rate tax liability?

Is the problem that until HMRC started swirling the water around, we all thought that we knew where the dividing line lay: avoidance was OK, evasion was not. The difference between them famously being ‘the thickness of a prison wall’.

Here’s a scary thought…

This brings me inexorably to the final subject: should we kiss goodbye to the whole exemption for private residences?

You can’t do that – HMRC wouldn’t want everyone claiming loss relief. Well of course not, that’s why you would introduce the measure when property prices are low and a substantial proportion of owners are sitting in negative equity.

What about people who have to move to another house?

Well, we could have rollover relief, and there would be no tax to pay if the proceeds were reinvested in another main residence.

It’s double taxation; after all I have paid tax on the money I use to buy my house.

Yes, but then again, I paid tax on the money I used to buy my clothes on which I pay VAT at 15%, 17.5% – or higher if the rumours prove correct.

Would it stop people at, say, retirement trading down into a smaller property.

Well perhaps, although if they needed the money they would presumably trade down and pay the tax and is this any different than, say, realising a portfolio of investments that had been built up for retirement?

Alternatively, owners might rent out, thus increasing the housing stock or they would effectively trade down on death.

Ultimately, a substantial amount of profit has been made so why should this not be taxed?

Naturally, the idea would need a little thought before implementation, but perhaps it is time to recognise that our great property-owning democracy has actually now transformed itself into a great property-business-owning democracy.

I was talking to someone the other day about when a business actually starts and they mentioned that many businesses start as a hobby. Is this what has happened here?

I remember as a child, my dad engaging in some DIY to make the house a better place to live in; mum and dad would potter about in the garden, perhaps grow some vegetables, maybe making a nice lawn for them to sit out on and for us to play on.

More likely what is happening now is that the DIY is with a view to installing a designer kitchen and bathroom and perhaps a ‘water feature’ in the garden to increase marketability when we try to sell in a year or so.

Perhaps property ownership has moved from a place where you carry on your hobby to a place where you carry on a business. Dare I wonder whether it is time that the tax system recognised this?
 

Issue: 4211 / Categories: Comment & Analysis , Capital Gains , Only or main residence