In a situation worsening every year, Colliers calls for reform of the system as local authority finances struggle following surge for reliefs during pandemic.
Local authorities are losing out on millions of pounds of council tax income because the Government’s business rates system is still giving many holiday home and second home owners the opportunity to avoid paying the tax, provided they make their properties available to rent. This situation has been made even worse by the pandemic.
Colliers estimates the total loss to local authorities from business rates relief for holiday lets in England and Wales alone is currently around £110 million a year - a significant sum that could certainly help bridge the gap in local authority finances, now suffering because of the pandemic.
Property owners who make their properties available to rent as holiday lets for 140 days of the year can claim they are a small business and as such can elect to pay business rates instead of council tax. However, as small businesses they can claim for relief on 100% of the business rates payable if their properties have a rateable value of less than £12,000. Those properties with a rateable value between £12,000 and £15,000 are also entitled to a relief on a sliding scale in line with the Government’s business rates relief policy.
Colliers has analysed the rating lists for the South West of England (Cornwall, Devon, Somerset and Dorset) where 9,600 new properties, claiming 100% business rates relief have entered the list in the last four years- an 82 % increase since the start of the 2017 Ratings List. According to Colliers’ estimates this flip from the council tax to the business rates list is costing the local councils an extra £16 million a year in council tax income. The South West now has 21,312 properties in the rating list that are eligible for 100% business rates relief and Colliers has estimated that if these properties at least paid council tax the local councils would benefit by £35.5 million a year!
The issue is most acute in Cornwall where 10,701 holiday let properties do not pay either business rates or council tax, due virtue of being holiday lets. Colliers estimate that if these properties paid council tax, the local authority would receive £18 million extra income every year.*
The above is despite the boom in house prices as the pandemic and consequent trend to “Staycation” has caused residential property markets in UK holiday destinations to rise steadily, particularly the South West, especially among second homeowners. House prices in Cornwall alone rose over 14% in the last year.
Looking at England and Wales as a whole, the picture is even more startling. According to Colliers there are over 73,000 holiday let properties now in the business rates lists in these countries that are eligible for 100% business rates relief, and as such do not pay business rates or council tax. Colliers estimates this is costing local government finances around £110 million a year in lost revenues.
John Webber, Head of Business Rates at Colliers said, “Despite posturing to look into this loophole whereby second home owners are able to avoid paying both council tax and business rates by stating their homes are available to rent for 140 days, it is astonishing that nothing has been done by the government in the last four years to reform the system -particularly in England.** Estate agents selling properties in popular domestic holiday areas positively advertise the rates savings advantages, which has probably contributed to the rise in house prices.
“Given the pressure on local authority finances, we find it incongruous that this loop hole has not been closed and it is unfair that the local tax burden remains weighed onto local residents or other types of businesses that are struggling to pay their bills.
“We want to make it clear we don’t blame the homeowners that take advantage of this tax break through making their properties available to let- this could be considered sensible tax planning. However we do blame the Government for over-seeing this mess which inevitably leads to friction in many coastal resorts. Most second home owners would gladly pay the minimum of council tax and neither need or expect this windfall at a time when public services are under enormous pressure.“
“The fact that this trend of flipping from the council tax to the business rates list is growing every year is also a real cause of concern. A £110 million loss of council tax every year will soon mount up over the years. The government really needs to reform the system and consider the state of local authority finances when it announces its business rates reforms this Autumn.”
* Based on average Council Tax payable per property in Cornwall is £1667 a year (Band D).
** In Wales a system has been introduced whereby holiday homes have to be let 71 days a year. However in England no proof of letting history is required.