KUALA LUMPUR: Following the uproar over the Parliamentary expenses scandal in the UK, the practice of “flipping” second homes is likely to be outlawed while the rate of capital gains tax may revert to parity with higher rates of income tax, said Shelagn Burke, an associate at Cluttons property consultancy on Jan 18.

In the wake of the expenses scandal, MPs have been discouraged from “flipping” second homes. Though UK residents are still allowed to own a second home, how long this option remains is up in the air especially as MPs are unlikely to want to allow the electorate to benefit from anything that they themselves cannot use, said Burke.

Among the allegations that sparked anger among the British were the tactic of “flipping” second homes while claiming mortgage interest payments, council tax and the cost of refurbishment.

The practice of “flipping” could be placed under review by either the current or future Chancellor after the general election this year, or in the budget before. This will end the tax breaks that arise from the “flipping” of second homes, with which so many MPs have avoided capital tax gains.

Should “flipping” be reviewed, consideration may also be given to amend the three-year “time to sell” rule. Under the “time to sell” rule, second homes owners are given three year’s grace in which to sell a second home by re-designating it as their principal private residence within two years of owning it, thus avoiding capital gains on the “flipped” property.

Upon successful transaction, the vendor may re-elect to change the status of the original principal residence back to being the main residence again. This rule allows the owner to sell the second home (owned for a period of less than three years) at a profit without paying capital gains tax provided it was designated as the principal private residence during the three-year period.

There also exists a temptation for people to convert income into assets to pay capital gains tax instead of income tax due to the lower capital gains tax rate compared with both basic and higher rate income tax.

This loophole could be closed, as tax will likely rise sooner rather than later to begin repaying the budget deficit. Should this be the case, then capital gains tax could be realigned with higher rate income tax in order to maximise tax revenues.

“Capital gains tax is an easy tax to increase without necessarily incurring universal unpopularity or losing votes as the tax primarily affects the wealthy. Such a move would also bring it back in line with inheritance tax,” said Burke.

With income tax rate currently at 40% but with a new upper limit of 50 % planned to come into effect from April 2010 for those earning £150,000 (RM820,284) or more, Burke said there is a dichotomy between the rate of tax paid on capital gains and that paid on higher incomes. A single rate of capital gains tax of 18% was imposed on individuals, trustees and personal representative on taxable gains for the tax years of 2008/9 and 2009/10.

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