Closing the tax loophole for second homeowners

Few of us would deny that we live in one of the loveliest parts of the country. Indeed, many people have chosen to buy second homes here, spending weekends and holidays in the countryside or by the sea. It’s a decision that has been replicated across the country: the 2021 English Housing Survey reported that the number of second homeowners rose from 1.81 million to 2.44 million in the past decade.

Running a second home can be expensive and many of these homeowners choose to let out their property as a holiday let to generate income. Up until now, if the owners declare that they intend to let out the property to holidaymakers, they can currently avoid paying council tax by registering the second home as a small business. They do not need to show any evidence that their home is being let out as a holiday lets and can access small business rate relief.

However, there have been concerns for some time that the system is being abused. It has been claimed that many people who allege they offer their homes to rent never let them out and simply leave them empty when they are not there. They then falsely claim that their property is a holiday let and thus avoid paying thousands of pounds in council tax, whilst the full-time residents of the community must continue to pay for local services. Furthermore, as more houses are bought up as second homes, the location then becomes unaffordable for local people.

The new rules will come into effect from April 2023 and will require second homeowners to prove that they let out their property at commercial rates, before they are eligible to access small business rates relief. In practice this will mean providing evidence such as leaflets, website listings and receipts from guests showing that the property is available to be rented for 140 days a year, and that it has been let out for at least 70 days a year. They will also need to show that the property in question will be available again in the year to come.

Those who claim they are letting out their second home but can’t provide proof of holiday rentals being offered and taken up, will have to pay council tax. This could include new property owners who will not have the necessary evidence of letting for the first year of residence. As a reminder, second homes are charged at the same rate as a main residence for council tax.

Second homeowners who have registered the property as a small business but who let friends and family use their property for free, or a nominal rate, are likely to find that doesn’t count towards the 70-day minimum letting requirement. However, there may be some compromise if the owner can prove that by offering a reasonable discount to family or friends, they have avoided the commission they would have paid on holiday marketing websites.

The new rules have come from Department for Levelling Up, Housing and Communities (DLUHC), and are designed to crack down on those who “take advantage of the system to avoid paying their fair share”, the DLUHC said. Michael Gove, the Secretary of State for Levelling Up, said: “The Government backs small businesses, including responsible short-term letting, which attracts tourists and brings significant investment to local communities. However, 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. 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.”

For more information on the tax regulations including business rate relief, please get in touch with one of our tax advisers.