We could always stick to the facts…..
Here is a tax expert with exactly that
There is currently press speculation that Labour Deputy Leader Angela Rayner failed to pay CGT on her house sale. Ms Rayner’s statement suggests she may have misunderstood the law. In some scenarios that could mean she failed to pay CGT of up to £3,500, but potentially less or zero. The amount of tax involved is therefore small but, in the interests of transparency, it would be helpful for Ms Rayner to clarify the position.
Here’s what appears to have happened, based on press reports and Angela Rayner’s
statement:
- Angela Rayner bought her house on Vicarage Road in Stockport for £79,000 in January 2007.
- In September 2010, AR married Mark Rayner. At some point shortly before or after that date, AR moved into MR’s house.
- AR’s brother moved into her house from that time. AR didn’t charge him rent.1
- AR sold her property in March 2015 for £127,500. So a gain of £48,500 before we consider costs of acquisition/disposal (such as estate agent fees) and improvements such as extensions etc.
- MR’s property was sold in April 2016 for £145,250. We don’t know the purchase date or price.
- AR and MR separated in 2020
Ms Rayner
says “As with the majority of ordinary people who sell their own homes, I was not liable for capital gains tax because it was my home and the only one I owned.”
This, however, isn’t how the rules work. Married couples2
can only have one principal residence for CGT purposes. A married couple who own more than one home are free to choose which is their “principal residence” for CGT purposes by
sending a nomination to HMRC within two years of the situation arising.
I suspect many people would find every part of this surprising. Most taxation works by reference to individuals, so it’s odd this rule allows only one principal residence per married couple. Odder still that marriage potentially creates a big tax disadvantage. And even more curious that you are free to choose which property is your “principal residence” without reference to whether it
really is. It’s therefore hard to blame Ms Rayner for misunderstanding the rules.
But it’s important to remember two things:
First, the tax system is complicated, and lots of people accidentally pay the wrong amount of tax (I’ve done it myself). That’s not a crime. It’s not a crime even if you’re careless or negligent. Ignorance is a defence to the crime of tax evasion. Calls for prosecutions for tax evasion were silly when we were talking about Nadhim Zahawi; they’re plain daft when we’re talking about Angela Rayner.
Second, everyone still has a duty to pay the correct amount of tax, and ignorance is no defence to having to pay it. Pay the wrong amount of tax (for any reason) and you’ll have to make up the difference, plus interest. And if you were careless, or fail to fess up to HMRC, then you’ll pay penalties too.
How much CGT is due
There are, broadly speaking,3 three possible scenarios:
1. AR and MR nominated AR’s house as their principal residence from 2010 to 2015
Again, it may seem weird that you can nominate somewhere as your principal residence when you don’t live there, but
you can provided it’s been your home at some point, and you’re not renting it out. Letting someone live there for free is fine, and there’s no suggestion AR charged her brother rent.4
In this scenario then AR had no CGT to pay, but MR potentially had CGT on his 2016 sale – if there was a gain (we know nothing about whether there was or not).
2. AR and MR nominated MR’s house as their principal residence
AR still gets the principal residence relief for the three years before her marriage. She also automatically received principal residence relief
for the last 18 months of her ownership.5
When the relief applies for part of a period of ownership,
you make a simple pro-rata calculation. AR therefore is exempt for about 63% of the gain, and taxable for 37%.6
What’s the gain? It’s the £127,500 sale price less the £79,000 purchase price, i.e. £48,500. AR should also deduct “
allowable expenditure“. This will include estate agent, survey and conveyancing costs on the sale and purchase- I’d guesstimate all of this was around £4,000.7 There may also have been costs of
improving the house, for example building an extension or conservatory – broadly speaking anything that adds value (but decorating doesn’t count). I’ll assume for the moment there were no improvement costs (that may be wrong given Ms Rayner’s reference to her brother being
good at DIY).
So if we limit the allowable expenses to that £4k, the pro-rated gain would be £16k (£44,500 x 37%).
The CGT annual exemption amount for 2014/15 was
£11,000. Meaning a taxable gain of about £5k and CGT of about £1.5k.8
And if AR had spent £15k or more on improvements, there would be no gain
So if we are in this scenario, and AR spent less than £15k on improvements, it may be that she accidentally failed to pay up to £1.5k of CGT. The rules are pretty complicated, with
lots of special cases, so it would be wrong to assume this is the correct number. It is, however, probably the upper limit,10 and there are circumstances which could result in a smaller figure.
The other point about this scenario is that AR probably deserves more criticism: if she understood enough about the rules to make a nomination, then why didn’t she pay the correct amount of tax?
But it is of course also possible, and probably most likely, that she made no nomination at all.
3. AR and MR didn’t make a nomination
In that case the principal private residence relief applies by reference to the property that was AR and MR’s
main residence as a matter of fact.
If AR moved in with MR from 2010 then that means the result will be the same as in scenario 2. If she moved in the year before, then she’d be exempt for about 48% of the gain rather than 63%. So more CGT to pay – about £3.5k rather than £1.5k.
Or the other way to view this is that, if she’d moved into MR’s house in 2009, AR would need to have spent £23k11 on improvements to have no capital gain.
The £3.5k figure is again probably an upper limit,12 and there are circumstances (aside from improvement expenditure) which could result in a smaller figure
There is currently press speculation that Labour Deputy Leader Angela Rayner failed to pay CGT on her house sale. Ms Rayner’s statement suggests she may have misunderstood the law.
taxpolicy.org.uk
www.property118.com
