The Finance Bill 2013, published on 10 December 2013, contained further details of the changes announced in the Chancellor's Autumn Statement on second home "flipping" for capital gains tax (CGT).
CGT "flipping" rules hit the headlines in 2009 when the MPs expenses scandal came to light, but the practice has since been untouched by the Government, leading many to assume that "flipping" would continue for the near future.
PPR relief
CGT "flipping" is a product of CGT "principal private residence" (PPR) relief. This is a relief that individuals (and some trustees) are entitled to when they sell their main residence. If the property has been your only or main residence for the entirety of your period of ownership, any gain you make when you sell is free of CGT. If you have more than one home, you can elect which is to be the "main" residence for the purposes of PPR relief.
PPR can only attach to one home at a time, so if you sell a second home that has not been your "main" residence during your period of ownership, you will be liable to CGT on any gain you make on the sale. However, the rules say that the property in question does not need to have been your "main" residence during the last three years of ownership: effectively you get PPR relief for the last three years for free (whether the property was your main home or not).
The "last three years rule" was originally introduced to assist people who had to move for work and who might not be able, or want, to sell their old home immediately. It would give them a three year period to decide whether they wanted to move permanently and sell their old home. However, in the Revenue's view this rule has been "exploited" by those with second or more homes, who are able to "flip" the relief from one home to another in such a way as to ensure they pay no CGT on any of their properties.
For example, an individual with a flat in London and a home in the country. The country home was acquired long before the London flat, so the individual elects for the country home to be the "main residence" for the purposes of PPR relief. The individual wants to sell the London flat. He knows about the "last three year rule" and decides to sell before this period expires. One week before the sale, he "flips" the PPR election to the London flat. This activates the "last three years rule" in relation to the flat. The flat has been owned for less than three years, so the whole of the period of ownership qualifies and no CGT is due on sale. As soon as the sale goes through, the individual "flips" the PPR election back to the country home. If and when he sells the country home, this will still be free of CGT (the one week it was without the relief is unlikely to make any difference).
Finance Bill 2014 – changes to PPR
The Finance Bill 2014 proposes changes to the ability to make use of CGT "flipping". The final three year period is to be reduced to 18 months, meaning that there will be a much tighter period for individuals to flip the relief between properties. It will still be possible, but realistically only fully effective where properties are retained for a short period. Note, however, that PPR is not available for properties acquired purely as an investment, i.e. with the aim of realising a gain on disposal. In such cases the Revenue may argue that any gain on disposal is subject to income tax rather than CGT. The Revenue could seek to invoke this rule where individuals seek to buy and sell properties within the 18 month period.
If the provisions go through, as expected, they will apply to sales where contracts are exchanged on or after 6 April 2014. However, if exchange occurs on or before 5 April 2014 and completion is after this date, the current PPR rules will still apply to the sale, provided completion takes place on or before 5 April 2015. There is therefore an incentive for a quick exchange for those sales that do not anticipate completing until after 6 April 2014.
There will also be an exception for disabled individuals and those living in care homes, provided they do not have any other residential property on which they can claim PPR, as the current three year rule will continue to apply.
So, has CGT "flipping" had its day? Not quite, but it will definitely be more difficult to make use of it.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
