'Over 100 MPs' in multi-million tax dodge over second homes

More than 100 MPs are using their expenses to commit a multi-million-pound tax dodge, it was claimed last night.

They are accused of using huge sums in parliamentary allowances to fund a second home while telling HM Revenue & Customs that it is in fact their main home.

Because MPs' second homes are usually in London, where property is more expensive, they can avoid massive capital gains tax bills by nominating the second home as their main home, because main homes are exempt from the tax.

This newest scam emerges ahead of Thursday's Commons vote on reforms designed to tighten up rules on allowances and restore MPs' battered reputation among taxpayers, who foot the bill for their generous expenses.

But The Mail on Sunday has been told that the new crackdown will do nothing to end 'the really big fiddle' – the capital gains tax dodge that is potentially worth tens of thousands of pounds to individual MPs.

Last night two MPs decided to blow the whistle on the racket. Labour's John Mann and Tory Mark Field broke cover to reveal how the scam works.

Under the rules, MPs can this year claim up to £24,000 to help maintain two homes – a family or constituency base and their London home where they live during the week while the Commons is sitting.

MPs are allowed to choose which property they regard as their second home and on which they will claim the Commons 'additional costs allowance' (ACA) to cover mortgage or rent costs – an allowance that is tax-free.

Last year, 415 MPs claimed ACA for mortgage interest and only 133 for rent, with the vast majority declaring their second home to be in London, where property traditionally is far more expensive.

But in an astonishing tax loophole, MPs owning two homes are allowed to tell HMRC that the second home on which they claimed the ACA is in fact their main home.

As everyone's main home is exempt from capital gains tax when it is sold, that would leave a cheaper and probably less profitable constituency home liable for the tax of 18 per cent of any increase in value.

Mr Mann, the MP for Bassetlaw, said: 'This is the really big fiddle and one that is quite legal.

'Parliament allows itself the luxury of this preferential tax treatment and the MPs' Estimates Committee scandalously ignores this well-known scam. On Thursday, this loophole should be closed once and for all.'

Mr Mann, who owns a constituency home and rents in London, demanded an end to the tax-free status of second-home expenses and criticised MPs for complaining about increased public scrutiny of their allowances, saying: 'I have yet to meet an impoverished MP.'

His attack on the capital gains tax loophole was backed by Mr Field, the MP for Cities of London and Westminster, who said: 'You're talking over 100 MPs doing this. It's not a small proportion.

'They would argue it's all totally within the rules but this system is unique to MPs. The fact that the ACA is tax-free is a total fiddle. It is little short of corruption.'

The proposed expenses reforms are set out in a report by a committee of senior MPs and include plans for more rigorous checks, including an obligation for MPs to provide more receipts for second-home allowance claims.

But Mr Field said they left the capital gains tax loophole and the tax-free status completely untouched.

'The authors of this report are putting two fingers up to the general public,' he said.

Neither Mr Field nor Mr Mann was prepared to name any MPs who were exploiting the tax loophole.

However, Nick Harvey, a Liberal Democrat member of the powerful MPs' Estimates Committee, which is proposing a tighter expenses system, confirmed the existence of the loophole and admitted that the proposed changes would not close it.

But Mr Harvey denied it was a major problem, saying: 'It is very unlikely that it happens on a widespread basis.'

An HMRC spokesman said: 'The Commons rules only apply to them. It's nothing to do with us.'