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Higher taxes for second home owners as business rate loophole closes

Following a consultation in November 2018 and a statement in the March 2021 Budget, the controversial business rates loophole for second homes will soon be closing.

The UK government is cracking down on owners who avoid paying council tax and claim business rates relief on their second homes, without actually letting them out to holidaymakers.

Local authorities in popular destinations like Cornwall and the Lake District have been losing millions of pounds as tax-dodging second home owners leave their holiday residences sitting empty.

The rules regarding business rates relief for second homes will be changing from April 2022 in Scotland and April 2023 in England – so let’s take a look at how this could affect you.

What was the business rates loophole for holiday homes?

Under the current rules, people could register their second homes as a business property to avoid paying higher council tax rates. Instead, they could claim small business rates relief, meaning they could pay no property tax at all if their second home has a rateable value of less than £12,000.

To take advantage of this tax loophole, second home owners merely had to declare their intention to let the property commercially for 140 days a year. They didn’t have to make realistic efforts to attract tenants or holidaymakers, or provide any evidence that they’re actually letting the property.

This means that hundreds, if not thousands, of second home owners could be abusing the system – pretending to be a small business providing holiday lettings, while the second home really sits empty when they aren’t there themselves. This leads to unfair consequences for the local communities.

Local authorities are losing valuable income from this council tax avoidance, which should be helping to fund public services in the area. Under-investment and empty housing can drive people out of their communities, contributing to a housing shortage as prices go up and populations fluctuate.

When are business rates changing for holiday homes?

To combat these issues and support local businesses, the government is tightening the rules around business rates for second homes. From 1st April 2023, second home owners will now have to prove that the property was available to let as ‘self-catering accommodation’ for at least 140 days out of the tax year, and was actually rented out for at least 70
of those days, to qualify for business rates.

Under the new system, the Valuation Office Agency
will assess properties to determine whether they should pay council tax
or business rates. Owners of second homes need to provide evidence such as websites or brochures advertising the holiday let, and details of bookings such as receipts.

If a second home owner claims to be letting the property out but can’t supply any proof, they’ll be switched to council tax instead. While this is likely to be far more expensive, as council tax rates are the same for second homes as they are for primary residences, it’s good news for local economies.

For accounting purposes, business rates consider occupancy per night. So, for example, a booking from a Thursday evening to a Saturday morning would only count as 2 of the 70 days – counting the Thursday night and Friday night only. Allowing friends or family to use the second home for free won’t count towards the 70-day minimum, though ‘reasonable discounts’ may be acceptable.

What about business rates for new lets?

Unfortunately, there will be no special rules introduced for newly available lets or purpose-built lets. This means that these properties will be liable for council tax until they meet the business rates criteria. So, the owner will have to pay council tax until they can prove that they’ve been letting the property for 70 days and have made it available for holiday rentals for 140 days out of that tax year.

As accountants and tax advisers will know, new second homes won’t be eligible for a business rates assessment until the 141st day
of availability. While the changes won’t come into effect in England until April 2023, it’s worth starting to plan and prepare now if you intend to let out a second home.

Need help with tax relief for your second home?

Running a second home can be costly, so it makes sense for owners to make some extra income by letting out their holiday home as a small commercial business. Second home owners who operate legitimate holiday lettings shouldn’t be affected by the change other than supplying paperwork.

However, if you own a second home and claim business rates relief, but aren’t sure how this move will affect you, then you should have an expert review your property before the end of next March. For example, the tax consultants here at GBAC
can gladly help you assess and plan for the next year.

Give us a call on 01226 298 298 today, or email us at info@gbac.co.uk
to discuss your second home.