How to get around the council tax crackdown on second homes

One in four English councils are already planning to use new powers to increase the amount of council tax paid by second homeowners, in a move that will see bills rise by hundreds – if not thousands – of pounds.

The new rules will broaden the definition of an “empty home”, and shorten the time a property can be empty before a council tax premium of up to 100pc can be charged.

Today, some second homeowners can already be charged the premium by their council if their properties are left unoccupied and “substantially unfurnished” for two years.

But under the Government’s incoming Levelling-Up and Regeneration Bill, this premium will be applied after just one year of a property being unoccupied. Properties which are “substantially furnished” will also be within its reach.

Until now, courts have taken an “empty home” to be a property not furnished enough to be habitable.

Will I pay more for my holiday home?

An investigation by The Telegraph has shown that 78 out of England’s 297 councils have already voted to apply this premium – by varying degrees – to second homeowners once possible.

However, given councils will have to give 12 months’ notice before making use of the premium, the power will not come into effect until the financial year starting 2025 at the earliest.

In an article published by the House of Commons Library in July, researcher Mark Sandford warned of the very real possibility that “many holiday homes” could immediately become liable for increased rates of council tax.

In England, second homeowners are exempt from the council tax premium if their empty property is an annex, or if they are in the armed forces and they have to move into armed forces accommodation as part of their work.

Second homeowners also need to be aware of the reset period. In England, if their property lies empty for two years – soon to be one year – then a council tax premium will immediately apply.

To reset the clock, second homeowners in England have to fill their property for a minimum of six weeks. However, if the property becomes empty again before the ‘reset period’ is up then the premium will apply again immediately.

In Scotland and Wales, councils already have the power to charge second homeowners with a council tax premium after a property is left empty for one year.

The maximum extra Scottish councils can charge is 100pc, and in Wales the Labour-led Government has allowed councils to charge an even greater 300pc. In England, councils can charge more than a 100pc premium if the property is left empty for longer than four years. 

So, a house left empty for up to five years can accrue a 200pc council tax premium, and one left empty for ten years can accrue a 300pc premium – much like Wales.

Can you save by switching to business rates?

An increasing number of second homeowners are registering their holiday lets as businesses to avoid extra council tax charges.

By switching from paying council tax to business rates, holiday let owners can claim small business rate relief and reduce their annual tax bill by up to 100pc.

The Government this year changed the rules to discourage second homeowners from switching to business rates, which ultimately costs the Treasury and local authorities.

Now, in order to claim business rate relief in England you need to have let out your second property commercially for at least 70 days of the year in the previous year, while continuing to advertise it for 140 days. The lettings need to be short term, with frequent changes of tenant.

In Wales, these thresholds are higher at 182 days of actual lettings in the last year, and 252 days of availability.

One thing to note, however, is that the rules are different if you want to cut your capital gains tax liability when you sell the property, according to Tim Walford-Fitzgerald, of accountancy firm HW Fisher.

An owner can claim business asset disposal relief on a holiday let if they want to sell it, which in turn can bring your capital gains tax bill down from 28pc to 10pc. But this is provided you have let it out for 105 days a year in the last two years of ownership and advertised it for a further 210 days a year.

Real estate firm Colliers estimates that there are now over 85,044 holiday let properties in the business rates lists in England and Wales eligible for 100pc business rates relief.

This means the property owners do not pay business rates or council tax. Last year, this figure was just 79,150, and the year before 73,000.

In Cornwall, Devon, Dorset and Somerset alone, 13,085 new properties have started claiming 100pc business rates relief over the past six years.

This is more than double the number claiming relief at the start of 2017, when the Government doubled the thresholds for qualifying properties’ rateable values from £6,000 to £12,000.

Second homeowners in Cornwall are the biggest beneficiaries of the switch, where 12,065 holiday let properties do not pay either business rates or council tax.

Business rates are based on a property’s “rateable value”. In other words, this is an estimate of the rent an owner should be able to achieve from the property.

For properties with a rateable value of between £12,001 and £15,000, the rate of relief will go down gradually from 100pc to 0pc.

So, if your rateable value is £13,500, you’ll get 50pc off your tax bill. If your rateable value is £14,000, you’ll save 33pc.

Local councils will use a property’s rateable value to work out an owner’s business rates bill.

This article was first published on July 28 2023 and has since been updated.