TAX NEWS - JUNE 2010

UK Tax: MPs and capital gains tax

By Ian Cowie, 01 June 2010 -- News that the Chief Secretary to the Treasury, Danny Alexander, avoided paying capital gains tax when he sold his taxpayer-funded second home at a profit reminds us – yet again – that politicians are playing by a different set of rules from the rest of us.

The Daily Telegraph revealed that Mr Alexander, who was appointed on Saturday after the resignation of fellow Liberal Democrat David Laws, designated the property as his second home for the purpose of claiming parliamentary expenses but described it to HM Revenue and Customs as his main home.

As I pointed out in this space more than a year ago, the fundamental problem with MPs' expenses is that they are allowed to claim tax-free payments for housing that would be subject to tax if any of their constituents claimed them.

Accountants calculate that MPs avoid an average of more than £54,000 a year in tax on parliamentary expenses claims which, according to official figures, usually exceed £135,000 each.

Second home allowances and other expenses average more than double the MPs' basic salary of about £63,000 and are not subject to tax. But accountants point out that constituents who were lucky enough to receive such sums from their employers would have to share 40 per cent with HM Revenue & Customs (HMRC).

Fiscal apartheid – or one set of tax rules for the rulers and another set for the rest of us – is the fundamental problem at the heart of the MPs' expenses scandal which has been overlooked amid all the hooha about porn videos, duck houses and moats.

Now there is a danger that confusion about excessive claims by many politicians may create a smokescreen for the abolition of valuable capital gains tax reliefs which enable constituents who move home to avoid paying tax on the property they have left behind.

The disclosure that Mr Alexander failed to pay capital gains tax comes at the same time as the coalition government considers plans to increase the rate of the tax for owners of second homes and buy-to-let properties in its  emergency budget on June 22.

When Mr Alexander sold his flat, the top rate of capital gains tax was 40 per cent. It has since dropped to 18 per cent but the Lib Dems are now pushing for it to be increased to 40 or even 50 per cent.

The Daily Telegraph is running a campaign calling on the Government to protect the savings of small investors and ordinary second-home owners from any rise in capital gains tax. This should include preserving the current exemption for gains on individuals' former main residence for the previous three years.

Some critics claim there is a contradiction in this newspaper having explained to readers how to make use of this capital gains tax exemption while also exposing how MPs abuse the system. The fundamental difference is that MPs claim tax-free payments to help them buy and improve their properties; payments which their constituents could not receive tax-free.

John Whiting of the Chartered Institute of Taxation said: "MPs benefit in many ways from agreements that mean various sums aren't taxed.

"These tend to be statutory rather than dispensations and include accommodation allowances paid for additional overnight expenses incurred in performing parliamentary duties, such as the second home allowance."

Mike Warburton of accountants Grant Thornton, said: "Frankly, it's a real gravy train. MPs enjoy favourable tax treatment on expenses, which I could not obtain for any of my clients who are working just as hard for the British economy as their elected representatives."

So, before Parliament puts up capital gains tax or any other taxes it must ensure that MPs have a lot more 'skin in the game' and are subject to the same rules as the rest of us. That way, they really could share our pain.