Tax

What is the second homes loophole?

Phil Hall, AAT Head of Public Affairs & Public Policy discusses the second homes loophole.

The loophole

In late 2018 and again in May 2019, AAT highlighted the need to close the loophole relating to second homes where council tax is avoided by classifying the home as a business and then business rates are avoided by taking advantage of small business rates relief.

Now, more than two years on, this issue has become more pressing because the assistance intended for genuine businesses as a result of Coronavirus is now being paid to those with second homes who may not actually be letting their property out.

Many of those who have utilised the holiday home loophole are likely to have received the £10,000 cash grant paid out to small businesses in March this year and may also benefit from millions of pounds from the £2.2bn additional support announced last month too.

Current system

In England, if a property is available to let for short periods that total 140 days or more per year, it will be rated as a self-catering property and valued for business rates. It doesn’t have to be let at all, simply “available to let” which opens up a significant avoidance loophole.

The situation in Wales is marginally better as being “actually let” is a requirement – it needs to be both available to let for short periods that total 140 days or more per year and actually let for 70 days. 

However, this also presents avoidance challenges because there is no requirement to prove that the property has actually been let.

Government action

The Government is already aware of the problem. Indeed, in late 2018 it held a public consultation on the issue. However, more than two years on no response to this consultation has ever been published and nor does it seem likely.

Government should urgently publish a plan of action, including a timescale, to tackle this problem, with a further brief period of consultation to ensure no unintended consequences arise and a cast iron commitment to ensuring anyone who seeks to abuse the system will be suitably penalised.

The solution

AAT previously suggested that to qualify for business rates relief properties in England should also have to be “actually let” rather than simply being made “available to let”.   

Being “actually let” is a requirement in both Wales and Scotland and should be so in England too.

AAT has also previously recommended extending the 70 day requirement as it appears to be too short a time period to benefit from generous tax advantages.

Separately to the issue of Business Rates and Council Tax, various tax reliefs and allowances are available for Furnished Holiday Lettings that are both available to let for at least 210 days a year and actually let for at least 105 days in the year.

It would therefore make sense to bring the Council Tax/Business Rates requirements into line with these existing tax arrangements.

If 105 days of actual letting is required for tax relief and allowances, why shouldn’t the same be required for designation as a genuine business?

A requirement to provide evidence of having actually rented the property would further reduce avoidance. This could be easily provided if the property is let on commonly used short letting platforms like Airbnb, Vrbo or Sonder. If rented privately then what form this evidence takes is a matter of debate but could include the financial accounts of the business, examples of property marketing e.g. online or newspaper adverts, evidence of lettings such as a guest book, calendar bookings, bank statements and so on.

Adopting this AAT recommendation would be a simplification because it would mirror existing tax arrangements for Furnished Holiday Lettings, providing greater certainty for all involved in holiday lets. 

It would also be a practical, fair and effective solution to the triple headed problems of council tax avoidance, business rates avoidance and the abuse of any future Coronavirus assistance schemes or similar. 

Phil Hall is AAT's Head of Public Affairs and Public Policy.

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