As the saga regarding MPs expenses continues to escalate we have seen the creation of a new term in the English language which is “flipping your main residence”. This is a process which has become very popular amongst many of the U.K.’s leading MPs but what exactly is flipping, what are the benefits and why is it so controversial?
MPs second home allowance
While there has been much mention of the second home allowance in the press and on the TV the truth is that there is no such specific allowance mentioned in the Commons expenses Handbook. There is an accommodation allowance which was designed to cover the cost of overnight accommodation for MPs on duty around the country. However, over the years this has developed into something very different and is now commonly referred to as the second home allowance – becoming one of the more popular MPs expenses of recent years.
In effect a second home allowance has been used by many MPs, completely within the rules, to cover the interest on mortgage payments on a second home used to help them carry out their duties as an MP, furnish these homes and cover an array of other expenses “connected” to the property. However, many MPs have made substantial profits selling these properties which to all extent the purposes were partly funded by taxpayers money. The second home allowance is around £22,000 a year and we have seen a significant number of creative uses for this particular treasure trove.
When is your main residence not your main residence?
The rules regarding MPs allowances state that expenses can be claimed against a property which is not your main residence. The idea being that properties acquired in and around London and in and around various constituencies, used primarily for accommodation purposes when MPs are on business, can be funded by the MPs expenses system. Officially your main residence is the home where you spend the vast majority of your time although there is some debate as to whether the systems currently in place to monitor the validity of main residence and a second home claims are robust enough.
As we will cover in due course, there are a number of anomalies regarding the main residence and secondary residence for allowance purposes and those for taxation issues.
The benefits of flipping your home
As we have seen over the last few days, a number of MPs from all parties have been found to have “flipped” their main residence and secondary residence on a regular basis. While there is no doubt in many circumstances there are reasons why these properties have been “flipped”, such as actually relocating families and partners on a full-time basis, there are some claims which have attracted the interest of the press and general media.
In essence by “flipping” your main residence and secondary residence MPs have been able to claim up to £22,000 a year in expenses on their second homes. The fact that the second home of many MPs has changed on numerous occasions has left many open to criticism from the UK public even though technically there has been no criminal offence or offence under the rules of the MPs expenses system. We have also see MPs claim the second home allowance on a property, sell the property at a substantial profit, then acquire a new property. They are then able to claim expenses against their new property, keeping all of the profits from the original sale and, in many cases, not paying any tax on their gains.
Bizarre claims on the MPs expenses allowance
Amongst the more unusual claims alleged to have been made against the MPs expenses system include funding for the maintenance of swimming pools, gardening work, treatment for dry rot, the changing of light bulbs, chandeliers, a variety of top of the range televisions and antique furniture to name just a few. While we have to repeat that so far there is no evidence that rules have been broken these are just a small selection of claims which have prompted amazement from the UK voting public.
Taxation issues
Firstly we need to confirm that the allocation of a property as your primary residence and secondary residence within the rules of the MPs expenses system is totally separate to those of the Inland Revenue and tax authorities. This has created a rather bizarre anomaly which allows MPs to claim that a specific property is their primary residence with the House of Commons, leaving them able to claim the second home allowance against another property, while denoting a different property as their primary residence for taxation purposes.
The reason this issue has prompted much anger from the UK public and political observers is the fact that no capital gains tax is payable on your primary residence even though in the eyes of the House of Commons expenses system the “primary residences” of MPs do not need to be the same as that nominated under taxation regulations. So in effect you could have a second home, on which substantial expenses can be claimed each year, which has been part funded by the UK taxpayer although for taxation purposes it is deemed to be the owner’s primary residence – therefore avoiding any capital gains tax on any subsequent sale.
Mortgage interest expenses
We have also seen a situation where many MPs have remortgaged their original family homes raising substantial funds, only to have these re-designated as their second homes which allows them to claim £22,000 a year in mortgage interest. The similarities between this particular practice and that of obtaining a tax free loan have not gone unnoticed by many observers, even though they are again within the rules of the MPs expenses system.
Conclusion
The flipping of main and secondary residences has been subject of much debate and much criticism over the last few months having come to a crescendo after the drip feed of specific expense claims by the Daily Telegraph newspaper. Only yesterday we saw promises from all parties that the system would be changed, some MPs would be forced to pay back “borderline” expense claims and an independent third party committee may well be set up to investigate up to 1,000,000 expense claims submitted over the last four years.
While there are many anomalies to the system, which allows significant profits to be crystallised on the sale of property part funded by the UK taxpayer, we must stress that under current regulations and expense guidelines, no rules or laws have been broken.