"Local authorities seem to have managed to return some properties to the council tax lists, but this is still not enough. A second homeowner can still let out their property for only 10 weeks of the year and therefore avoid paying any business rates or council tax"
- John Webber - Colliers
The latest insight from Colliers has revealed that local and central governments are still losing out on millions of pounds of council tax income because, despite the latest regulations, the current business rates system continues to give many holiday-home and second homeowners the opportunity to avoid paying the tax, provided they make their properties available to rent and rent them out for just 10 weeks of the year.
Colliers estimate the total loss to the government due to the system of business rates relief for holiday lets in England and Wales alone is now around £172 million a year (2024/2025) - a significant sum that could certainly have helped bridge the gap in local government finances.
Under the latest regulations, property owners who make their properties available to rent as holiday lets for 140 days of the year and let them as commercially as self-catering accommodation for short periods of 70 nights or more, can claim they are a small business and as such can elect to pay business rates instead of council tax.
As small businesses, they can then claim for relief on 100% of the business rates payable if their properties have a rateable value of less than £12,000. Those properties with a rateable value between £12,000 and £15,000 are also entitled to relief on a sliding scale in line with the current business rates relief policy.
Although the previous Government was trying, through tighter regulation, to reverse the trend of holiday homeowners “flipping” from the council tax to the business rates system to avoid paying any tax, the figures are still too high.
Colliers has analysed the rating list for the Southwest of England (Cornwall, Devon, Dorset and Somerset ) and found that the total number of properties on the list that claim 100% business rates is 23,412, only slightly down from 23,817 last year.
If these 23,412 properties which currently pay neither business rates nor council tax paid basic council tax, the local councils would benefit by over £55 million or more.
The Southwest holiday let business represents 29% of the total holiday lets in this bracket in the UK.
The issue is most acute in Cornwall where 11,259 holiday let properties do not pay either business rates or council tax, due to the virtue of being holiday lets and classified as non-domestic. Colliers estimate that if these properties paid council tax, over £26 million of extra income would be raised every year in Cornwall alone, which would be a great support for local services.
According to John Webber, Head of Business Rates at Colliers: “Although current measures in place are tighter than they have been in the past, they are just not strong enough to deter second property owners “flipping” into the business rates list and thus reducing the local authority’s ability to collect funds.
"Local authorities seem to have managed to return some properties to the council tax lists, but this is still not enough. A second homeowner can still let out their property for only 10 weeks of the year and therefore avoid paying any business rates or council tax.
"The fact that the number of properties entering the business rates lists remains high, is a testament that the measures are not working.”
Webber fears that current policy towards second homes could make the situation even worse, unless amended by the new Labour administration. Under the Levelling Up and Regeneration Act, local authorities have the right to charge double council tax on second homes, which it defines as “furnished, for own personal use but not a main residence”.
Underlying this policy is a desire to reduce the number of second homes and free up more housing for the locals. Cornwall Council has announced it will charge an additional 100% Council Tax premium on second homes from 1 April 2025 and according to latest reports, more than 150 local authorities have also announced they will impose the inflated levy next year.
This will impact more than three-quarters of England’s second homeowners who will be charged double council tax in 2025, affecting as many as 130,000 properties.
Webber continues: ”The incentive to flip properties into the business rates list will be even higher as council taxes rise. Some councils are talking about rises of 200 or 300%.”
“If Cornwall Council believes ‘tripling’ council tax on second homes is the answer to deterring second homeowners and solving the local housing crisis they are living in “cloud cuckoo land.
"Offering either double or triple tax or no tax will only encourage even more people to try to flip from council tax to business rates.
"And even if some second homeowners are deterred and sell up and leave the area, locals are unlikely to be able to afford such housing in any case and local businesses that were supported by these owners and their properties will also suffer, depleting the tax take even further.”
Looking at England and Wales as a whole, Colliers estimates that there are now over 79,874 holiday let properties in the business rates lists in England and Wales that are eligible for 100% business rates relief, and as such do not pay business rates or council tax. Although this is down on last year, when the comparable figure was 85,044 properties, Colliers estimate this is reducing local authority income to around £172m a year.
Webber said: “Despite posturing little was done by the previous government in the last five years to properly reform the business rates system. This is especially extraordinary given the pressure on local authority finances and the subsequent need for central government to fill any gaps.
"The local tax burden remains weighed onto residents or other types of businesses that are struggling to pay their council tax bills, which have again risen substantially in this last year.
"Meanwhile, agents selling properties in popular domestic holiday areas positively advertise the business rates savings advantages, which has probably contributed to house price inflation.
“While Local Authorities may be compensated by Central Government in some respects for these losses in council tax, the point is less money will be collected locally which will mean less to spend on services or on affordable housing that local residents actually need.”
He adds: “Politicians bicker about the lack of social housing in places like Cornwall and portray people buying second homes as the villains.
"Yet if Cornwall Council had been able to charge holiday let owners at least the same as a council taxpayer they would have received over £100 million of extra income in the last four years alone, which they could have spent on building affordable housing in the county. The problem is not second homeowners, it is politicians failing to understand the issues and having the courage to do something about it.”
“Threatening homeowners with punitive council tax rises is not going to solve the issue long term either.”
Webber concludes: “Three years ago, we estimated the loss of income to government was £110 million, two years ago it was £150 million and last year it was £170 million. This year the figure is £172 million. Such losses have mounted up over the years, with the government increasingly needing to bail out local authorities. The new government should reform the whole system and do it thoroughly.”
