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.1If that’s wrong then the position gets more complicated. Possibly more CGT. Possibly, because of the availability of letting relief, less/zero CGT (and letting relief probably doesn’t apply to informal arrangements where no rent is charged, although the point is not entirely clear).
- 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 couples2Who are living together – this is defined to basically mean “not separated”, so even if a married couple live separate lives in separate houses, they are probably “living together” for tax purposes 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 (in effect) a defence to the crime of tax evasion – because “tax evasion” means intentionally and dishonestly failing to pay tax. 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,3Because they could have changed their nomination. 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.4Given the large gain that arises from buying a council house at a discount, nominating AR’s house may have been the rational move, even if it was slightly less valuable than MR’s house.
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.5The rules are now less generous – you only get nine months
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%.62,981 days of ownership, 1,339 days in which she lived there, 548 days for the last eighteen months. (1,339 + 548) / 2,981 = 63%).
What’s the gain? It’s the £127,500 sale price less the £79,000 purchase price7Probably! It is a bit of an unusual situation, because the purchase is plainly not at market value, thanks to the discount. CGT rules provide that, where a transaction is not at arm’s length (or between connected persons) then the actual value paid is replaced by the market value. One could argue that the unusual nature of a council house sale-at-a-discount, where the parties don’t negotiate at all, is that it’s not at arm’s length. If so, Ms Rayner would have £26,000 less gain, and so (after the pro-rata calculation and annual exemption) not tax to pay. However I am very doubtful that is the correct result. My instinct is that the council and Ms Rayner are unrelated parties, acting commercially, and the fact the sale terms are driven by statute doesn’t stop the sale being at arm’s length. However I have not researched the point and it may be more nuanced than this. Thanks to S for suggesting this point., 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 £4,000.8I made some quick calls, and real estate contacts estimated that in 2015 the survey will have cost around £400, estate agent fees on her sale would have been about 1.5% plus VAT, plus conveyancing fees of about £600 on sale and purchase. 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.9Assuming AR had exhausted her basic rate band and so was taxed at 28%; also assuming AR had no other capital gains that year, and no carried-forward losses. These feel like reasonable assumptions. And finally, assuming that AR didn’t sell part of her interest in the property to MR before the sale, so using his annual exemption as well. That would likely have eliminated any CGT, but it’s the kind of planning that seems unlikely for someone who was not receiving tax advice at the time.
And if AR had spent £15k or more on improvements, there would be no gain.10I made a bad mistake in the original version of this article, and forgot that the improvement amount is subject to the same pro rata calculation as the gain. So I said £5k of improvements would mean no gain. My apologies – and many thanks to Martin Wardle on LinkedIn. It goes to show the danger of advising in an area where you don’t have real expertise. The original article was based on a discussion with three experts in this area, one of whom kindly reviewed the draft. However I added the “amount of improvements you’d need to eliminate the CGT” just before publishing, and didn’t check with the experts. So naturally that’s the bit I got wrong. It’s not good enough – my apologies. The practical difference means we’re probably now at the “new kitchen and bathroom plus other works” level of improvement required to zero the CGT, rather than just a new kitchen.
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,11Bearing in mind in this scenario we are assuming Ms Rayner lived in the house until she married 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 £23k12The same bad mistake – the original version of this article said £12k on improvements to have no capital gain.
The £3.5k figure is again probably an upper limit,13Again noting the assumption that she moved out of Vicarage Road in 2009 and there are circumstances (aside from improvement expenditure) which could result in a smaller figure.
What next?
I’m not generally in favour of forcing politicians to publish all the details of their tax affairs – anyone with something to hide will hide it, and all we’ll see are prurient details of their financial affairs, plus the occasional accident/mistake. But now the story is out, it would be sensible for Ms Rayner to speak to a tax adviser and work out what her CGT position in 2015 actually was. If it turns out she failed to pay a small amount of CGT, I think most people would understand that as a mistake – but it’s a mistake she can and should explain and correct.
Credit to Politax for getting there first with this article; we both take a slightly different approach but end up in the same place.
Angela Rayner official photograph by David Woolfall, licensed under the Creative Commons Attribution 3.0 Unported license.
- 1If that’s wrong then the position gets more complicated. Possibly more CGT. Possibly, because of the availability of letting relief, less/zero CGT (and letting relief probably doesn’t apply to informal arrangements where no rent is charged, although the point is not entirely clear).
- 2Who are living together – this is defined to basically mean “not separated”, so even if a married couple live separate lives in separate houses, they are probably “living together” for tax purposes
- 3Because they could have changed their nomination.
- 4Given the large gain that arises from buying a council house at a discount, nominating AR’s house may have been the rational move, even if it was slightly less valuable than MR’s house.
- 5The rules are now less generous – you only get nine months
- 62,981 days of ownership, 1,339 days in which she lived there, 548 days for the last eighteen months. (1,339 + 548) / 2,981 = 63%).
- 7Probably! It is a bit of an unusual situation, because the purchase is plainly not at market value, thanks to the discount. CGT rules provide that, where a transaction is not at arm’s length (or between connected persons) then the actual value paid is replaced by the market value. One could argue that the unusual nature of a council house sale-at-a-discount, where the parties don’t negotiate at all, is that it’s not at arm’s length. If so, Ms Rayner would have £26,000 less gain, and so (after the pro-rata calculation and annual exemption) not tax to pay. However I am very doubtful that is the correct result. My instinct is that the council and Ms Rayner are unrelated parties, acting commercially, and the fact the sale terms are driven by statute doesn’t stop the sale being at arm’s length. However I have not researched the point and it may be more nuanced than this. Thanks to S for suggesting this point.
- 8I made some quick calls, and real estate contacts estimated that in 2015 the survey will have cost around £400, estate agent fees on her sale would have been about 1.5% plus VAT, plus conveyancing fees of about £600 on sale and purchase.
- 9Assuming AR had exhausted her basic rate band and so was taxed at 28%; also assuming AR had no other capital gains that year, and no carried-forward losses. These feel like reasonable assumptions. And finally, assuming that AR didn’t sell part of her interest in the property to MR before the sale, so using his annual exemption as well. That would likely have eliminated any CGT, but it’s the kind of planning that seems unlikely for someone who was not receiving tax advice at the time.
- 10I made a bad mistake in the original version of this article, and forgot that the improvement amount is subject to the same pro rata calculation as the gain. So I said £5k of improvements would mean no gain. My apologies – and many thanks to Martin Wardle on LinkedIn. It goes to show the danger of advising in an area where you don’t have real expertise. The original article was based on a discussion with three experts in this area, one of whom kindly reviewed the draft. However I added the “amount of improvements you’d need to eliminate the CGT” just before publishing, and didn’t check with the experts. So naturally that’s the bit I got wrong. It’s not good enough – my apologies. The practical difference means we’re probably now at the “new kitchen and bathroom plus other works” level of improvement required to zero the CGT, rather than just a new kitchen.
- 11Bearing in mind in this scenario we are assuming Ms Rayner lived in the house until she married
- 12The same bad mistake – the original version of this article said £12k
- 13Again noting the assumption that she moved out of Vicarage Road in 2009
49 responses to “Did Angela Rayner fail to pay CGT on her house sale?”
Slightly wider question but I think a lot of MPs will have questions to answer. If they claim expenses for a second home (either in constituency or in London) this is by definition not their main home so CGT will be due when they sell.
If I had to guess (and obviously it’s no more than that) I’d say that the advice Angela Rayner received was that she and her then husband ought to have made an election (but didn’t), that one of them ought to have returned a Capital Gain (but neither did) and that one of them should now disclose a gain. I suspect that they retrospectively agreed that her husband should declare an omitted gain which enables her to say that the advice she received was that SHE had no CGT to pay.
Of course, in the absence of an election, it ought to be which, on the facts, was their residence for CGT purposes and if he and the children lived in one place and she spent time in both, then on those facts (such as we know them) HMRC would be likely to conclude that his place was the main residence.
In reality, if he declared a gain and offered to pay some tax and there wasn’t much tax difference between the two potential gains, HMRC wouldn’t have the enthusiasm for an enquiry and so would accept what was being voluntarily offered.
One of the more baffling aspects of the media coverage is that despite your excellent analysis which is freely available to any journalist, the coverage still seems to blunder around as if they’ve no idea of the issues.
Nominations are probably a bit of a red herring. She could only nominate somewhere that she was actually occupying as a residence (there are some cases where deemed absence under “period of absence” rules can count, but that wouldn’t be relevant unless she moved back in). If she just moved out and never moved back in, the period after moving out (except the final 18 months) is exposed. Probably a tiny amount of tax at stake once stamp duty, legal fees, agent fees and any home improvements are taken into account though (without any tax planning whatsoever).
Agree Rachel, please clarify/correct.
Her purchase in 2007 was a a price of £79k, well below the threshold at which stamp duty land tax would have applied.
The Annual Exemption was £11,100 not £11,000
She was a Home Help at the time, so only 18% not the higher tax rate.
There are photos on Rightmove and Zoopla of her refurbished kitchen – the work involved ie Knocking a wall down, putting a lintel for a new window, plastering etc plus the cost of he units would not be a DIY job but would cost at least £10 to £15k back in the 2010’s
How does this compare with Lord Ashcroft’s position re the paradise papers? It shows how low the Tories have sunk AR wasn’t even an MP then
A late question on this article. If much of the increase in value in the house came through the Right to Buy discount on council houses, this would mean the house was worth a lot more than £79 000 at the point when Rayner married.
Does the CGT liability start at marriage or when the house was purchased at which point Rayner was not liable for CGT on the property?
it works off the price she paid, which is after the discount
Why is that? Doesn’t RTB assume that she’s already paid for X amount of the property, so whilst she’s paid £79k, she’s also essentially paid £26k deposit, so the assumed value of the property at purchase is £105k
I’m not a fan of Rayner but it seems to me it’s likely she has not underpaid tax.
If she bought in jan 07 and lived in until married (assumed) in sept 10 then that would exempt 3 ‘yrs worth’ of gain. She would also qualify for the last 36 mth exemption as the rules were then. This leaves only around approx 2 yrs or 2/8ths of the gain which would then be covered by letting relief. Then there’s her annual exemption for CGT. All in all it seems there is no tax to pay? It may change a little depending when she stopped living in the property but if she lived there til marriage or even only for a couple of years then it seems CGT is nil. As I say not a fan but I object to inaccurate reporting/accusations.
I believe most advisers in this area are sceptical that lettings relief can apply to an informal arrangement of this kind, where no rent was charged.
I thought your analysis was very balanced and sensible, as ever.Unfortunately, BBC Newsnight have just “cherry-picked” parts of your article and presented them as though they were final conclusions, rather than possible scenarios…journalists hey? I hope that doesn’t cause unnecessary flak for you as they did take pretty big liberties with what you are actually saying.
I thought their coverage was pretty fair – what do you think they missed?
There is no issue: you could say this about anyone making a disposal of property when you don’t hold all the facts…”In some scenarios that could mean she failed to pay CGT of up to £3,500, but potentially less or zero…amount of tax…small but, in the interests of transparency, it would be helpful for Ms Rayner to clarify the position.”… What a load of cod’s wallop. The media speculation that this is stirring up is horrific and it hints of a misogynistic attack. You just don’t have the data to make a calculation. That is the real story. What of the CGT of the other 650 MPs? There are a lot of clues from the expense scandal if you want to go back and start there. No respect here.
I don’t think you read the article. As I say at the start, the issue is that Ms Rayner initially said something false: that there was no tax because we don’t pay CGT on our home. I’ve covered other politicians who were the subject of tax controversy; I’m not sure why I should have let this one go.
Hi Dan,
Great article as usual.
I know it’s unrelated but anyway.
I would like to ask your opinion about who is considered a first time buyer in the UK.
I think it is very unfair that any type of home ownership abroad disqualifies you as a first time buyer in the UK regardless of the value of the property abroad.
For example if your grandfather left you a 10% interest in an apartment abroad when you were 15 years old worth £10k today you are not considered a first time buyer in the UK.
Therefore you lose all the benefits of a first time buyer.
It’s a bit absurd.
Any thoughts?
Kind regards,
S
Hi – it’s not something I’ve looked at, so I can’t say if that scenario is in the rules. But I agree it’s a very blunt instrument.
Some of this article isn’t accurate – there are reasons you can nominate a main residence for a property that’s rented out .. under the absence rules (various rules – working abroad, absence for any reason for I believe 3 years and so on)
Critically the property however has to be your main residence before and after the period of absence and you have to nominate within 2 years.
A married couple can only have 1 main residence – if they were living between the 2 properties (or the absence rules apply) then AR could nominate her property as main residence.
If no nomination is made within 2 years main residence is treated on the facts (where they spent most time, mail sent, HMRC address for correspondence and etc)
It seems pretty clear here that AR assumed they could both have a “main” residence – you can’t as a married couple.
Primary residence relief and absence rules are horribly complicated – but if a politician can’t get it right what chance do mere mortals have..
thanks – yes, I do say that the rules are complicated with lots of special cases, and the figure I come up with is an upper bound (subject to the assumptions).
To be fair, AR wasn’t an MP when she bought or sold the house.
If the 1982-97 inflation rules had still been in place, the tax due on her house even if not nominated as her private residence, would be more likely to have been zero.
“It didn’t occur to me to seek expert advice” might be a reasonable defence for some in society. But for someone who this time next year could be a minister of state it is a pretty terrifying thought.
There is another scenario i.e., what if AR nominated her house as her principal residence and MR his house as his principal residence because they didn’t discuss their tax affairs with each other and/or were unaware of the unusual tax treatment of this situation.
@Patrick Bearchell, the technical answer is that both nominations are invalid – s222(6) TCGA 1992 – but I agree that this is also a possibility
That’s not possible. For a married couple, such an election has to be a JOINT election.
s222(6) TCGA 92 “where a notice under subsection (5)(a) above affects both the individual and his spouse or civil partner, it must be given by both”
AR is the shadow housing minister, regardless of the amount of CGT that is or isn’t due HMRC will take a look at this and AR needs to show transparency in this case.
It’s possible HMRC are technically out of time… but I agree that ethically/politically AR should do the right thing regardless.
Dan, are you saying that a taxpayer who fails to declare a liability to tax, either by error or design, which is not questioned or disputed by HMRC for six years, is then free of the legal obligation to pay the tax?
normally HMRC can go back four years. If you’re careless they can go back six. In some circumstances (e.g. an offshore element) they can go back twelve. If deliberate they can go back twenty (and in a few other cases too). You can be sure HMRC will be very sceptical of “it was an accident, guv” if large amounts are involved, or there is reason to believe the situation was engineered.
Could this be why the tax advice AR has says no CGT is owed?
Of course into the bargain it is not AR’s knowledge or status now that is in any way relevant to the issue but her knowledge at the time if she failed to make any declaration and pay any CGTax.
Additionally HMRC’s ability to recover any tax interest and penalties could be adversely affected if AR had filed a tax return for the year of disposal – although carelessness and failing to have notified her chargeability could secure their recovery position for up to 20 years back.
Given that this was, at most, a careless mistake that happened over 6 years ago, is she under any legal or moral obligation to pay the tax?
Legally – probably not! Morally? Ask a vicar!
See EM3980
https://www.gov.uk/hmrc-internal-manuals/enquiry-manual/em3980
There could also be an argument that although her FTN etc was not careless or deliberate at that time there was an unreasonable delay in her bringing her error to the attention of HMRC and correcting her error that would bring her back into the net.
This is a ridiculous storm in a tea cup. Let’s compare and contrast AR’s oversight of a couple of grand of unpaid CGT with the actions of Sunak’s family…. or with the outrageous, calculated and deceptive behaviour of our former Chancellor of the Exchequer over millions of unpaid dues.
Lovely explanation though. Thank you.
Why is GB News targeting one of the poorer MPs who did not have all the advantages to get where she did nor an accountant./tax advisor of anywhere near Mr Neidle’s competence on capital gains. The point about married couples being at a tax disadvantage is good one, and is surprising and shocking actually. The rightwing papers are trying to make out it was a council house she had at a rent and then bought it – a Thatcher policy particularly now with rents so high in the open market and no social housing to speak of being built,one of the biggest errors of Thatcher years and vying with privatisation of nearly everything Britain owned like Water Companies, and creeping NHS privatisation as one of the ‘big issues’ at the election.
What about HMRC charging penalties and interest where there is tax to pay, but even if there is no tax would there still be a penalty for failing to notify the sale?
possibly not in 2015 – would have to check.
Thanks, Dan. It’s not quite correct to say that something can be your main residence “when you don’t live there”. To qualify, the property still has to be a “residence” – which means you must still “reside” there – and there is a lot of case-law as to exactly what that means. So if AR’s brother had full occupation of the whole property then AR couldn’t claim relief for that period. However, I do agree that if – for instance – she kept a bedroom of her own there; left some clothes in the wardrobe; a toothbrush in the bathroom; and had her own key and did actually spend some nights there – then she could probably still say it was her residence even though, factually, she lived most of the time elsewhere
It is less about the tax, more about the ducking and diving she is doing to pretend she didn’t live in her husband’s house, when her children were registered there and the neighbours at her house state that they never saw her, only her brother lived there.
Nice to see politicians on the left getting the ‘benefit of the doubt’ when they get it wrong…. as it should be.
I try to always give everyone the benefit of the doubt. I didn’t accuse Zahawi of deliberately not paying tax. It would be very odd if I took a different approach for Rayner.
Another example of the bonkers tax laws, yet ordinary people are supposed to understand. Still, she can always sue her advisor and if she didn’t have one she was ‘careless’ and should be brought to justice. Yes it is unfair but as we have been told, unfair or not that is the law!
The CGT rules about principal private residence relief are surprisingly complicated, particularly where divorce or separation is involved, and can end up being rather like an exam question. As Dan says, it would make sense for Angela Rayner to have the position checked out and pay any CGT which may be due.
Nice breakdown of options.
Yes, a set of complicated tax regs. to entangle. Scenario offers plenty of opportunity for leadership and improvement too.
Namely:
human error is normal; blame fixes nothing; learning can be spread widely around (bet lots of us lay folk don’t know this stuff); context drives behaviour (who really thinks about CGT implications in the first few years of a new marriage); how we (and they) respond matters
(being clear and open will give AR & MR credible, even moral, authority; give the benefit of doubt).
Ordinary people are expected to understand the tax code, which is why we have PAYE. Anyone else is, as a minimum, expected to take necessary steps find out rather than guess.
But that’s the point. The Law is complicated and people with expertise, like Dan here, cost a lot money; they don’t offer advice gratis. Why should they? They have to earn a living just like the rest of us, and expertise makes you come at a premium. So the Law is inherently biased against ordinary working people. If there were universal accessible Legal Aid for everything, it wouldn’t be a problem. Sadly, that isn’t the case.
I don’t think we could ever live in a world when people making a capital gain get free tax advice. Don’t think any country has such a system. The answer is automation, and HMRC’s current system for this is pretty good.