Tax relief for foster carers, but doubt continues for adult carers

Published on 2 September 2004

Following the Finance Bill debates, LITRG now has an assurance that foster carers will not face any potential capital gains tax liability when they sell their home. However, for adult placement carers, the tax position remains uncertain.

Last month we reported that Howard Flight MP, Shadow Chief Secretary to the Treasury, had written to the minister in charge of the UK tax system, Dawn Primarolo MP, asking her to clarify how foster carers and adult placement carers were treated for capital gains tax when they sold their homes. See the article ‘Worries about capital gains tax – and carers’ (16 July).

The question we asked to be clarified concerned a section of the capital gains tax legislation which requires the tax relief normally given on the sale of one’s home to be restricted where part of the home has been used ‘exclusively for business purposes’. In the past we have had queries from both foster carers and adult placement carers asking whether the restriction applied to them because of their caring activities.

Foster carers

Ms Primarolo has now replied as follows:

‘I am glad to be able to reassure you that there is no restriction of [capital gains tax private residence relief] for foster carers as a result of their caring activities when they sell their homes, even when a foster child has its own bedroom or where a room has been built or modified for a foster child’.

The reason she gave was that, to the extent that fostering is regarded as a business, it is a business of providing services and includes no obligation to provide specific accommodation within the home set aside exclusively for the foster child.

Adult placement carers

Ms Primarolo continued:

‘I regret I cannot be quite so categorical about the position of adult placement carers as the position will depend on the facts of each individual case, including the terms of the contract between the carer and the provider.’

However, even if adult placement (AP) carers do have their private residence relief restricted because of this rule, they may be able to claim other capital gains tax reliefs which may mean that there is no capital gains tax to pay. The commonest of these are described at the end of this article (scroll down to Other reliefs available).

Ms Primarolo declined to follow our request that AP carers should simply be deemed not to be carrying on a business for the purposes of claiming private residence relief. She felt that to do so would ‘introduce undesirable inconsistency’ and ‘distinctions of an arbitrary nature’ into the tax system. However, she did appreciate that this left AP carers with a complex set of calculations to perform when selling their home, and would look into whether specific guidance was needed.

LITRG comments

During the debate on the Finance Bill, Howard Flight MP said:

‘It seems to me to be morally wrong that people are penalised if they are doing good in the community by fostering children or adults.’

Nobody on the Government side dissented from that view. Indeed in her letter to Howard Flight, Ms Primarolo stated:

‘We value greatly the contribution that carers make to society and we do not want unjustified fears of the tax system to divert them from their important work.’

While the news that foster carers now have no such fears in relation to the selling of their homes is welcome, AP carers still face uncertainty and an extra bureaucratic burden for the sake of preserving a purely technical distinction in the tax laws.

We have always acknowledged that rarely, if ever, do the rules result in AP carers actually having to pay tax on the sale of their home. But well-informed and conscientious carers do worry about their position, and seeking advice might involve them in costs in terms of time and money. This does ‘divert them from their important work of caring’. The fact that they will probably have no tax to pay is small comfort when they have to perform a complex calculation in order to find this out. The nature of the calculation is such as to defeat many tax professionals, let alone lay people.

If they are unwilling to change the law, we believe the the Revenue should issue an extra-statutory concession. This type of ruling is:

‘a relaxation which gives taxpayers a reduction in tax liability to which they would not be entitled under the strict letter of the law.’

One of the uses of the extra-statutory concession is:

‘to meet cases of hardship at the margins of the code where a statutory remedy would be difficult to devise or would run to a length out of proportion to the intrinsic importance of the matter.’

This, in our view, would be the appropriate way of ensuring that AP carers are indeed able to get on with their important work without worrying about whether they will incur a tax liability when they sell their home.

Other reliefs available

Meanwhile, the following brief summary of other reliefs available on the sale of a home, besides private residence relief, might assist carers in assessing whether they need to take further advice.

  • Lettings relief. This can reduce the AP carer’s gain by up to £40,000 where, under the arrangements with their service user and the local authority, they have ‘let’ part of their accommodation (e.g. a bedroom) to him or her under a licence or similar agreement.
  • One lodger. Where part of the home is set aside for the use of a single lodger, the Revenue do not in practice require private residence relief to be restricted. But this only works where there is one lodger, not where there is more than one, so it is a fairly arbitrary practice.
  • Taper relief. This relief effectively ‘writes off’ a percentage of the gain for each complete year in which the AP carer has lived in their home. Because the taxable part of the gain relates to the use of part of the home for business purposes, thebusiness taper enables the gain to be written off at a fast rate, by 75 per cent after two complete years. The taper relief began in 1998, and before then indexation allowance wiped out the part of the gain attributable to inflation as measured by the retail prices index.
  • Annual exempt amount. This is an annual amount which everyone is entitled to set against any taxable gain they make in a year. For the current year 2004-05 it is £8,200 for an individual, and in the case of a married couple husband and wife are each entitled to claim the amount.

(02-09-2004)

Contact Name: Robin Williamson (Contact tel: 0844 579 6700, Fax: 0844 579 6701)

Relevant Link: APC and foster carer relief commentary on LITRG website