MPs and the second home gravy train

MPs and their second home allowancesAs the UK property market continues to flounder there is a growing resentment amongst the UK voters with regards to various expenses claimed by the country’s MPs and in particular the second home allowance which many MPs have exploited to the max. These are the rules which in effect allow MPs to acquire second homes in and around Parliament which are partly funded by the taxpayer with more hidden benefits for MPs.

The controversial allowance which has attracted the attention of so many taxpayers of late is called the Additional Costs Allowance (ACA) and is defined as follows:-

Column 1: Cost of staying away from main home

The Additional Costs Allowance (cost of staying away from main home/ ACA) is paid to reimburse Members for necessary costs incurred when staying overnight away from their main home for the purpose of performing parliamentary duties. Inner London Members do not receive this allowance.

2006/07 ACA maximum of £22,110
2005/06 ACA maximum of £21,634
2004/05 ACA maximum of £20,902

Column 2: London Supplement

Inner London Members receive the London Supplement instead of the ACA. Outer London Members may choose between the ACA and the London Supplement. In 2004/05, Ministers who did not live in official accommodation and certain office holders automatically received the London Supplement with their salary in addition to ACA where eligible.

2006/07 London Supplement: £2,712
2005/06 London Supplement: £2,613
2004/05 London Supplement: £1,618

So why was the ACA introduced?

Interestingly the official terms of the ACA, as listed above, do not specify interest only mortgages as one of the main reasons for the allowance although it is by far and away the most popular allowance with many MPs. It would appear that over the years the use of the ACA to cover interest on mortgages for second homes has become something of a standard practice amongst many MPs.

Looking at the wording of the allowance it seems as though the figures in question were originally introduced to cover hotel and other overnight accommodation costs. While there is no doubt that many MPs spend a lot of their time in and around the Houses of Parliament the fact that they are able to use this allowance to cover interest on a mortgage is only the tip of iceberg.

Ownership of a second home

The main concern to taxpayer groups seems to be the fact that while MPs are repaying the capital on any property they acquire as a second home, it is the taxpayer who is funding the interest payments which over a 20 year mortgage period can be enormous. We are literally looking at potentially hundreds of thousands of pounds in taxpayer’s money which then goes into a property which the MP owns outright. The fact that MPs are able to sell the property and retain any profits for themselves with no recourse whatsoever back to the taxpayer is the major bone of contention.

Many people see this situation as they “gravy train” which the vast majority of MPs are using to gain exposure to the London property market at the expense of the taxpayer. Maybe if the allowance in question was used wholly to cover hotel costs and other overnight accommodation expenses it would not receive as much criticism from the UK population.

Capital gains tax on a “second home”

One of the anomalies which appears to have materialised over the years is the fact that while the property receiving the Additional Costs Allowance is ultimately in the eyes of Parliament a second home, many MPs have been found to state this as their primary residence in their tax affairs. This means that as and when their “second home” is sold there is no capital gains tax to pay as primary residence are exempt under UK law.

So in order to receive taxpayer assistance it is classed as a second home but in the eyes of the taxation services it is classed as a primary residence. Quite how this situation has been able to rise is a mystery to many although there is nothing illegal about the activity.

The John Lewis list

Aside from the fact that MPs are able to claim the ACA to cover interest on their second home mortgages they are also able to claim taxpayer expenses to cover such items as £10,000 for a new kitchen, £350 for a washing machine and many other “household expenses”. While there are changes in motion regarding the so-called “John Lewis list” much of the damage has been done in the eyes of the public.

The future

There has been a major backlash against the second home rules for MPs over the last couple of years and while there has been much talk of changes to the system it seems as though one allowance is being replaced by another and MPs will be no worse off. The argument that some MPs may actually have losses on properties which were bought at the peak of the property cycle is fairly weak because at the end of the day they have received massive subsidies to cover interest charges which the everyday public in the UK have to pay on a monthly basis.

Until 2006 it was also possible for MPs with two homes to mortgage one as their secondary home in the eyes of the ACA allowance and claim interest on future mortgage repayments. Again, while there was nothing illegal about this it was stopped in 2006 as many believed it went against the spirit of the various allowances in place. To many people this was yet another example of the abuse of taxpayer funding which has seen the millions of pounds invested into UK property with no recourse back to the taxpayer as and when the properties are sold.

Thankfully the Scottish parliament has amended its particular rules to ensure that MSPs are not able to claim interest payments from the taxpayer and then retain the whole profit as and when their second home is sold. Quite how this situation arose regarding the retention of the profits on second homes which have been partly funded by the taxpayer is a mystery to those “outside of the loop”.

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