A recent report published in December 2010 for the Office for Tax simplification has identified restricting the rules surrounding the current Capital gains tax relief on disposal of private residences. The suggestions outlined in the Interim report may impact second home owners and buy to let investors who have purchased second homes and who have seen substantial capital gains. In particular it identifies the process of ‘flipping’ (or re-designating your main residence for tax purposes) as as ‘questionable’.
At present the taxman allows the re-designation between a main residence and second home as long as certain conditions are met. This is usually done to avoid paying capital gains tax within a 3 year timeframe. The process of ‘flipping’ has been thrust into the limelight by the recent MP expenses scandal. Recently MP’s in the coalition called for a scrapping of the council tax discounts enjoyed by second homeowners to equalise the ‘imbalance’ between local communities paying for services enjoyed by second homeowners based elsewhere.
The report highlights possible changes to Principal Private Residence Relief (PPR) as part of the calculation for capital gains tax. It is possible that the three-year rule may be reduced or abolished as part of a future exercise for tax simplification. Critics of the coalition have highlighted that the entire simplification exercise is simply an excuse to get rid of tax reliefs in order to increase tax revenues. The report comments:-
“There must be scope for revising the various exemptions, testing how many are still necessary or valid and whether they can be replaced by simpler, more pragmatic rules. There is also the issue of the, last three years relief, which is there for the sensible reason that a taxpayer who finds himself unable to sell his old house is not penalised for having bought his new house on schedule. However this supports the practice of flipping, and it is questionable whether the period is too long”.
Any changes to a three year rule may impact people with second homes. The Office of Tax Simplification on 20 July 2010 to provide the Government with independent advice on simplifying the UK tax system. The Office of Tax Simplification (OTS), created in July, is reviewing all 1,042 reliefs. It said it’s “provisional recommendations” for the 13 reliefs it had singled out aimed to create feedback ahead of it’s full report next year.