The Government is cracking down on second home owners who claim their properties are holiday lets for tax purposes.
Communities secretary Michael Gove is set to close a tax loophole which has allowed second home owners to avoid thousands of pounds per year in taxes, without proving that the property was ever rented out.
The new rules will target those who register their holiday lets as small businesses, meaning they are eligible for business rates instead of council tax.
But the majority pay no business rates at all under the system, because they have ‘rateable values’ of under £12,000 based on the property’s rents, size and usage.
Crackdown: Those registering second homes as businesses could fall foul of new rules
A second home can be registered as a small business if it will be available as a holiday let for 140 days or more in the coming year.
However, there is currently no requirement to provide evidence that a property has actually been let out, leaving the system open to abuse.
This has caused anger in areas that have lots of second homes, such as Devon, Cornwall and the Lake District, as some locals believe property owners are not paying their fair share towards council services.
According to Ray Boulger of mortgage broker John Charcol: ‘Some 97 per cent of the 65,000 holiday let properties in England have rateable values of under £12,000, which means they qualify for small business rates relief and pay no rates at all.’
The new rules aim to change this by ensuring that only those properties which are actually rented out for 70 days per year, and available to rent for 140 days, get the tax break.
Kurt Jansen, director of the Tourism Alliance said: ‘It makes a very important distinction between commercial self-catering businesses that provide revenue and employment for local communities, and holiday homes which lie vacant for most of the year.’
This is Money explains how the new system will work, and how second home and holiday let owners can make sure they are following the rules.
Locals in UK holiday spots have expressed anger at second home owners, who they say are not contributing their fair share to the community and services via council tax payments
What do the new rules say?
The rules are based on the amount of days a property is rented out in each tax year.
To qualify for business rates instead of council tax, the new legislation will require second home owners to prove their property will be available for ‘commercial short term, self-catering rentals’ for at least 140 days in the coming year.
They will also need to prove that, in the previous year, it was available for letting for 140 days and actually rented out for at least 70 days.
This is designed to prevent second home owners from registering their properties as small businesses, and then not actually renting them out.
‘We will not stand by and allow people in privileged positions to abuse the system by unfairly claiming tax relief and leaving local people counting the cost,’ said Gove when he announced the policy.
‘The action we are taking will create a fairer system, ensuring that second homeowners are contributing their share to the local services they benefit from.’
Anger among locals has increased since the start of the pandemic, as wealthy people snapped up UK holiday lets when travelling abroad was not allowed.
Exempt: As they are assessed differently to bricks and mortar properties, caravans being used as holiday lets will not come under the government’s new second home tax rules
What counts as a holiday let?
The business rates rules for holiday lets only apply to buildings, or self-contained parts of buildings, that would otherwise be assessed for council tax.
Caravans will not generally be subject to the rules, as they are usually assessed for business rates under a different system to bricks and mortar buildings.
When it comes to counting the days that a property was rented out, the government says that only days where the property was occupied at the end of the day should be included.
So if a property was let out from Friday evening to Sunday morning, it would have been let for two days for the purposes of meeting the holiday lets criteria.
Is this definitely going ahead, and when will the rules come into force?
The government has concluded its consultation on the new policy, which started before the pandemic in 2018. It plans to implement the changes from 1 April 2023.
However, the legislation needed to do so has not yet been passed in parliament.
While the government has made clear its intention to enshrine the new rules in law, they are not set in stone just yet.
How much would I pay under each system?
Small businesses can find their rateable value on the Government website.
Those with a rateable value of below £12,000 are not eligible for business rates, while those with a value of up to £15,000 pay special tapered rates.
For those with a rateable value of between £15,000 and £51,000, they will need to multiply that value by 49.9p to find out their rateable value. They can then subtract any discounts that they may be entitled to, which the government details here.
Those with a rateable value of more than £51,000 will follow the same calculation, but with a higher multiple of 51.2p.
As for council tax, second homes are charged at the same rate as main residences.
Individual councils may decide to give a discount for second homes, or on homes that have been empty for two years. Owners should contact their council to find out if this is available.
Under the new rules, the government has said there will be no rate or council tax discount for those with lots of properties.
What if I have a new holiday let with no proof of lettings for last year?
Those acquiring a new holiday let and wanting to register for business rates will not be able to prove that their property was available to let for 140 days and actually let for 70 days in the past year, as required by the new rules.
Until the owner can provide that proof, they will be subject to council tax – meaning most will need to pay that for at least the first year of their ownership.
After that, they can ask the Valuation Office Agency (VOA) for a business rates assessment.
This is the government body that handles everything to do with business rates, and it will be responsible for policing the new rules once they come in to force.
Don’t lie low: Property owners who don’t think their property meets the new letting rules, but who are paying business rates, are advised to inform the VOA as soon as possible
I don’t think my property will meet the criteria for last year. What should I do?
Some holiday let or second home owners will not be able to prove that their property was available to let for 140 days and actually let for 70 days in the past year.
The government says people in this position ‘should notify the VOA as soon as possible, so that their property can be assessed as domestic and revert accordingly to (or be given) a council tax valuation.’
It adds that failure to do so could result in a large, backdated council tax bill.
How will it be policed?
When seeking a new business rates valuation after April 2023, second home owners will need to provide evidence that their property was let or available to let for the required periods.
The government has said will communicate the exact method for collecting evidence before the new rules come into effect.
However, this is expected to include things like the property being listed on rental websites, and evidence of payments from guests.
‘Evidence of lettings will be required, such as at least one website or brochure used to advertise the property and letting details and receipts,’ says Boulger.
Those already paying business rates on their holiday let or second home, and who meet the letting requirements, do not need to submit anything.
However, they should ensure that they have evidence of the last year’s lettings by April 2023, as the VOA may ask for them at any time.
‘The only impact the new rules will have on genuine holiday let properties might be the need to provide the evidence outlined above, but this information should be readily available for the owner’s tax return,’ says Boulger.
What if the property is used by family and friends?
Those who regularly allow family and friends to use their properties for free could find they are no longer eligible to register as a small business under the new rules.
The government says lettings counted in the 70-day period must be on a ‘commercial basis’ at ‘market rates’ and that ‘lettings to friends or relatives at zero or nominal rents will not be covered.’
No more mates rates? Money will need to change hands when the property is let, or it will not be counted as a holiday letting under the government’s new 70-day rule
Of course, if there are 70 days of commercial lettings on top of discounted ones to friends and family, this will not be a problem.
Boulger says owners should still be able to rent to people they know at a small discount as part of the 70 days, for example if they are deducting the fees that a listings website would normally charge for a letting via their platform.
‘It should not prevent the owner offering a reasonable discount to family on friends if, for example, they can avoid the normal commission otherwise payable to the sites advertising their property,’ he says.
What are the rules outside of England?
Wales has already had similar rules for holiday lets in place since 2010, and the new legislation will bring England in line with those.
The Scottish government is also set to introduce a requirement that holiday lets are rented for 70 days and available for 140 days in a given year, following a consultation called the Barclay Review.
These rules are set to come into force from 1 April 2022.