Thursday, 18 June 2009

Flippin' Hell

Yet another minister has been forced to resign because she flipped her home for tax purposes. Because capital gains tax is payable on property sales with an exemption for the tax payer's principal residence it makes sense for any one with two or more homes to be principally resident in the one they plan to sell. All that is required to establish residency is to occupy the property for a period of time (in this case the minister's tax advisor suggested one month) and then when its sold no CGT arises and the tax payer moves back into their other home and that then becomes the principal residence.

Now all of this is perfectly legal, its a loophole which has been in place since CGT was first levied on property, and anyone who owns two properties would be foolish not to take advantage of it. This is the difference between tax avoidance and tax evasion. If you sell a property that is not designated as your principal residence and do not declare the sale for tax purposes then that is illegal - if you go through the minor inconvenience of reestablishing your residency in the property concerned you can avoid a hefty tax bill and that is perfectly OK.

So why did the hapless minister feel compelled to resign? Well its all down to the hypocritical humbug which features so much in the UK media. I doubt whether the editors of the national press have never engaged in some tax avoidance measure: blind trusts and jumping a generation for inheritance tax purposes for example? It is surely within the right of any individual to arrange their affairs in such a way as to minimise their tax bill providing what they do is not illegal and that goes for treasury ministers just as much for anyone else. But then, no one has put the financial affairs of journalists and editors under the spotlight. Why not? These individuals have an enormous effect on our public life and our politics. They tooo should be held to account.


sheena said...

obviously there is a difference between tax evasion and tax avoidance- The latter is legal, the former is not.
Clearly you discussed how the minister have gone thru the tax avoidance path to avoid paying that tax bill, which we as accountants may advice our own client :O
However, Bob, I would very much appreciate to know about your opinion on the other expenses that the ministers have claimed, (namely the £0.01 phone bill, amongst others ) :)
Have a good weekend Bob

Professor Bob Ryan said...

The problem with expenses is that they have been confused with an allowance system designed to compensate MP's for the requirement to maintain two properties in order to fulfill their duties. Now I do not condone fraud although I do accept the argument that the 20K allowance was set up by the last conservative government with the expectation that it would be claimed. MP's for many years have not had their salary reviews accepted and so we get the situation that their income is just sufficient to maintain one property never mind two. The view of the fees office and the Commons authority was that any expense, to do with the designated second property, could be entered and no questions asked. The attitude by the authorities was that the 20K is to be claimed so claim it. The nonsense of flipping homes occured when the allowance could not be absorbed on the London property (usually) and they were encouraged to change their designated second home. The whole system was sloppy in the extreme.

A lot of MP's - who are hard working and really care about their constituents - feel very angry that they have been betrayed by the system and I can understand their point of view.

I think that much of the furore about MP's allowances is hypocritical. We have an economy where about 11% of GDP is lost through underdeclaration of tax every year. The misclaiming of benefits is put at 14bn. These are huge numbers and a huge problem.

So. to anwswer your point about the 1p phone bill - shouldn't we be worrying about something else?

Anonymous said...

HI Mr RYan ,

can u plz recommend sum book on F.M like the way v r having "colin drury" for "mgt accounting"

its a complete text "with Q based on pro. level exams of ACCA/CIMA/ICAEW"

i rephrase my question is there any book which "incorporate papers of ACCA/CIMA/ICAEW FOR financial management"