Harry Gillow is a public and EU law barrister. He previously worked for Sir Bill Cash MP on the Brexit campaign.
Another day, another campaign pothole swerved. Labour will be relieved that Greater Manchester Police have yesterday confirmed their intention not to take further action over Angela Rayner’s tax affairs.
There have been some excellent analyses on Angela Rayner’s alleged tax avoidance to date. This article won’t repeat the detail of those, perfectly pitched to send all but the most hardened tax enthusiast to sleep.
Rather it will explain the genesis – and the irony – of the tax rules that have caused Rayner’s difficulties: rules in fact designed to stop tax avoidance by the wealthy. To understand that, and why she has found herself in the nasty “grey area” of tax avoidance, it’s worth a look at the history of capital gains tax.
Capital gains tax and main homes, a potted history
When capital gains tax was first introduced (a surprisingly recent invention, dating to 1965), an exemption was made for those making a gain when selling their main home (this is Principal Private Residence (‘PPR’) relief).
PPR represents a mix of principle and political expediency; simultaneously encouraging home ownership and avoiding painful taxation on the sale of what, for many people, will be their most valuable asset.
It has, however, been carefully drafted to avoid providing a tax loophole. Under tax reforms implemented in the early 1990s, the rules were changed to stop potential tax avoidance by married couples, in connection with some fundamental rule changes to how married couples are taxed.
Imagine a situation where a married couple own two homes, one in the city and a weekend home in the country. They decide to sell up both homes and downsize for their retirement. It would, the logic goes, be unfair if PPR relief could be used to enable the married couple to avoid capital gains tax on both their country home and their city home, with one of the couple declaring that the country home was her main residence and the other declaring that the city property was his.
To avoid such abuse of the system, the rules introduced in the 1990s prevent married couples from having different main residences, essentially as an anti-avoidance measure.
What that law does is prevent ‘cakeism’ – in the example above, the couple would have to choose between their country home and their city residence being eligible for PPR relief, but paying capital gains tax on the sale of the other property. This is the rule that has potentially caught out Angela Rayner.
Rayner’s case
When the story broke, there was a substantial amount of uncertainty about the tax analysis. For example, some commentators noted that if Rayner had spent a few tens of thousands doing up the property and selling it, those costs could be offset against the modest gain, resulting in no gain – and therefore no potential tax – at all.
But when Rayner emerged to give interviews, she clarified that her defence to capital gains tax relies entirely on PPR relief, and in particular the argument that the property she sold was her ‘main residence’ throughout her period of ownership.
The term ‘main residence’ is not defined in tax legislation: it is instead a broad concept that looks to all the factual circumstances. Like ‘domicile’, it’s an amorphous legal concept, taking into account factors such as where you and your family spend most of your time. In other words, these are sensitive legal tests that are very difficult to be certain about.
Since the concept of ‘main residence’ is so amorphous and uncertain, no tax adviser worth their salt would, in a factually complex situation like Rayner’s, give an unequivocal opinion that PPR relief was available.
Rather than acknowledging the complexity, however, she gave several media interviews in which she has stated, unequivocally, that she was eligible for PPR relief, staking a lot of political capital and credibility on being right on something by its very nature uncertain.
Perhaps the key aspect to this, however (especially in light of the Greater Manchester Police to drop their investigation) is enforcement. Any potential tax avoidance took place around ten years ago. The starting point is that HMRC only have up to four years to investigate incorrect filings in a person’s tax return, or six years in the event it can be shown that the person (or their advisers) acted carelessly.
While these time limits can be extended up to 20 years in the case of fraud – for example, letting a home not bought on a buy-to-let mortgage without telling the bank, or avoiding the Right to Buy clawback on renting out a property within five years – fraud is very difficult to prove,
Where it leaves Rayner is that, in all likelihood, no-one will ever be able to prove conclusively whether she did not pay tax that she ought to have. But the reverse is likewise true: she is unlikely ever to be able to prove she didn’t avoid tax. While she may have avoided any legal consequences for now, this incident may yet stay with her for the rest of her political career.
