Landlords and second homeowners exploit tax loophole that costs councils millions

Thousands of landlords and second homeowners are exploiting a legal loophole to avoid paying council tax, leaving local authorities with a huge shortfall in revenue, the Daily Telegraph reveals.

The loophole allows owners of holiday lets and second homes to register as small businesses and pay lower business rates instead of council tax, if they rent out their properties for at least 70 days a year.

And, if their properties have a rateable value of less than £12,000, they can claim 100% tax relief and pay nothing at all.

Costing councils in England and Wales around £170m a year

Now real estate firm Colliers says the loophole is costing councils in England and Wales around £170m a year – up from 2022’s figure of £150m.

And, the firm warns, growing numbers of second homeowners and landlords with holiday lets are switching to business rates.

Colliers says there are more than 85,000 holiday let properties in the business rates lists that are eligible for 100% business rates relief.

The move would see them not paying council tax or business rates.

In 2021, there were 73,000 properties not paying, that has now risen to 79,150.

‘Little has been done by the Government’

The head of business rates at Colliers, John Webber, told the Telegraph: “Despite posturing, little has been done by the Government in the last five years to properly reform the business rates system.

“The fact that the number of properties entering the business rates lists is still growing, is a testament that the deterrent is not working.”

The data also shows there are 13,085 properties in Somerset, Dorset, Devon and Cornwall that are claiming 100% business rates relief.

That’s more twice the number claiming relief in 2017, when the threshold for qualifying properties’ rateable values was doubled from £6,000 to £12,000.

The figures show that the issue is a problem in Cornwall where there are 12,065 holiday let properties not paying council tax or business rates.

Colliers estimate that if these Cornish properties did pay, more than £27 million of extra income would be raised each year.

Practice has been condemned by Michael Gove

The practice has been condemned by Levelling Up Secretary Michael Gove, who said he wants to protect local people from being ‘pushed out of cherished towns, cities and villages by huge numbers of short-term lets’.

However, some local councils have tried to crack down on second homeowners by increasing council tax on second homes, but this has backfired as more owners have switched to business rates.

For example, the Labour-led Government in Wales approved powers to increase council tax on second homes by up to 300% from April this year, but this has resulted in a loss of £2.4m in council tax revenue, according to the Welsh Local Government Association.

According to the Office for National Statistics, there were 23,000 second homes in Cornwall in 2019, accounting for 10% of all dwellings – but only 8,000 of them are registered for council tax.

The rest are either registered for business rates or not registered at all.