James Purnell's £20,000 tax trick

James Purnell, a rising cabinet star, was plunged into a new row this weekend about MPs’ expenses over his ownership of two properties. The controversy centres on a flat that he bought in London before becoming an MP and his Manchester constituency home, which he acquired several years later. He was able to claim thousands of pounds of MPs’ expenses on the London home and is accused of exploiting a tax loophole to avoid a huge bill on its sale. Purnell, the work and pensions secretary, received about £20,000 a year in allowances on the London flat because he had told the Commons authorities it was his second home. But when he sold the flat in October 2004 he told the Revenue that it qualified as his main home, allowing him to escape thousands of pounds in capital gains tax charges, which can be levied at up to 40%. Purnell, a former adviser to Tony Blair, bought his London flat in 2000, according to Land Registry records, before he became an MP. When he sold the Bloomsbury mansion flat in October 2004, he avoided capital gains tax because he said it qualified as his main residence. However, from April 2003 if not earlier he was telling the Commons authorities that his London flat was his second home and claiming about £20,000 a year in housing subsidies. Purnell was elected an MP in 2001. He confirmed this weekend that he bought his Manchester constituency home in June 2002 and at that point it became his main residence. That would have enabled him to claim housing allowances on his second home in London, under rules allowing MPs to claim the cost of staying away from their main home. Purnell confirmed that from April 2003 he claimed the second-home allowance on his London flat. He said he could not recall which property he claimed on between 2001, when he became an MP, and 2003. He said that the parliamentary authorities had destroyed the records because they were so old. Existing records show that the MP claimed about £20,000 a year in additional-cost allowance between 2001 and 2007. The allowance can be used by MPs to subsidise the cost of having two houses and to pay mortgages and refurbish properties. In the financial year 2003-4, Purnell claimed the full available amount, £20,333, in additional-cost allowance. He sold his seventh-floor flat in London in October 2004, escaping capital gains tax, which is payable on second homes. He said the flat was classed as his main residence under capital gains tax rules. They allow this if it has been the owner’s main residence at any time in the previous three years. Although this is allowed under the tax rules, the flat was at the time of sale the MP’s official second home under parliamentary rules. A spokesman for Purnell said he had not broken the rules or been inconsistent: “James has correctly followed both House of Commons and HM Revenue & Customs rules. He has not broken any rules and it is wrong to suggest otherwise. James bought his constituency home in June 2002. He sold his London home in October 2004. No capital gains tax was due on that sale. The Taxation of Chargeable Gains Act 1992 provides an exemption from capital gains tax where the property has been the individual’s only or main residence and it is then sold within three years. “As the London property was the only one James owned until June 2002 and it was sold in October 2004, that condition is clearly met.” Purnell was promoted last month from culture secretary to work and pensions secretary, head of a huge-spending department and responsible for stamping out benefit fraud. He succeeded Peter Hain, who resigned after the police launched an investigation of the funding of his deputy leadership campaign. The Times