Second home-owners who declare their property as a holiday rental for tax purposes are being punished by the government.

Michael Gove, Communities Secretary is looking to close an tax loophole that allowed second-home owners to save thousands of pounds each year on taxes without having to prove they rented the property. 

These new rules target holiday let owners who are registered as small business entities. They will be eligible for rates of tax instead of the council tax.

But the majority pay no business rates at all under the system, because they have ‘rateable values’ of under £12,000 based on the property’s rents, size and usage. 

Crackdown: Those registering second homes as businesses could fall foul of new rules

Crackdown! Those who register second homes as business entities could be in violation of the new rules

If the second property will be used as a vacation rental for more than 140 days in the next year, it can be registered as small business.  

However, evidence is not required to prove that the property was actually let out. This leaves the system vulnerable to abuse. 

Some locals feel that property owners don’t pay enough for council services, which has led to anger in some areas with lots of second homes like Cornwall, Devon and Lake District.

According to Ray Boulger of mortgage broker John Charcol: ‘Some 97 per cent of the 65,000 holiday let properties in England have rateable values of under £12,000, which means they qualify for small business rates relief and pay no rates at all.’

This is changing with the new regulations. Only properties that are actually rented for at least 70 days per annum and made available for rent for at least 140 days will be eligible for the tax exemption. 

Kurt Jansen (director of Tourism Alliance) stated that he made the important distinction between self catering businesses and vacation homes. These are those which generate income and create employment in local communities.

The new system is explained in This Is Money. It also explains how holiday home owners and second-home owners can ensure they follow the rules. 

Locals in UK holiday spots have expressed anger at second home owners, who they say are not contributing their fair share to the community and services via council tax payments

UK vacationers have voiced their anger at second-home owners who, they claim, aren’t contributing enough to the community via council taxes.

How do these new rules work? 

These rules take into account the number of days that a property has been rented in each tax year. 

In order to qualify for the business rate instead of council taxes, second home owners will need to demonstrate that the property can be used for “commercial short term, self cater rental” for at most 140 days during the next year. 

The landlord will need to show proof that the property was available for rental for 140 days in previous years. 

This law is intended to stop second-home owners from using their property as a small business and not renting it out.  

Gove stated that the government would not tolerate people who are in positions of privilege to abuse the system, unfairly seeking tax relief and leaving the people paying the bill. 

“The actions we’re taking will create an equitable system and ensure that second homeowners contribute their fair share to local services.

Local anger has increased after the outbreak of the pandemic. Wealthy people bought UK vacation lets to travel abroad, but this was against the law. 

Exempt: As they are assessed differently to bricks and mortar properties, caravans being used as holiday lets will not come under the government's new second home tax rules

Exclusivity: Because they are not assessed the same way as bricks and mortar property, holiday homes that use caravans will be exempt from the new government second home tax rules

What qualifies as holiday lets?  

Holiday lets are only subject to the business rates rules. They do not apply to self-contained buildings. 

The rules do not apply to caravans, which are generally assessed at business rates according to a different system than bricks and mortar buildings. 

The government does not count days rented to a property.

For the purpose of holiday lets, a property would be let out for two days if it was rented from Friday night through Sunday morning.

Do you think this is going to be a reality? And when will it come into force.

The consultation process for the government’s new policy has been completed. It began before 2018’s pandemic. They plan to make the changes effective as of April 20, 2023. 

However, legislation to enable this have not been yet passed by Parliament.

The government is clear in its intent to codify the new rules into law but they have not yet been set in stone. 

Which system would you recommend?

You can check the Government’s website to find out how small businesses rate their value. 

Those with a rateable value of below £12,000 are not eligible for business rates, while those with a value of up to £15,000 pay special tapered rates. 

For those with a rateable value of between £15,000 and £51,000, they will need to multiply that value by 49.9p to find out their rateable value. You can also subtract any discounts they might be eligible for, as the government provides more details. 

Those with a rateable value of more than £51,000 will follow the same calculation, but with a higher multiple of 51.2p.  

Council tax is charged to second homes at the same rates as primary residences. 

Some councils offer discounts for homes with two-year empty periods or second homes. For more information, contact your council.

The new regulations state that there won’t be a rate discount or reduction in council taxes for people who have many properties.  

If I own a holiday rental with no evidence of previous lettings, what happens?

A person who is registering for business rates and purchasing a vacation let will be unable to show that the property they are letting was not available for rental for more than 140 days. 

They will not be able to provide the proof until the owner has provided it. This means that most owners will need to pay council tax at least for the first year. 

Then they may ask for a Business Rates Assessment from the Valuation Office Agency. 

This government agency handles all business rates. It will then be in charge of policing new rules after they become effective. 

Don't lie low: Property owners who don't think their property meets the new letting rules, but who are paying business rates, are advised to inform the VOA as soon as possible

Do not lie: If you aren’t sure if your property is compliant with the new letting regulations, but are still paying business rates, it’s a good idea to notify the VOA immediately

My property doesn’t meet last year’s criteria. What do I need to do?

Many holiday home or second-home owners won’t be able prove their property was let 140 days ago and let 70 days during the previous year. 

People in these situations should inform the VOA promptly, according to government advice. This will allow their property to be assessed domestically and be reverted (or given) to a council tax valuation. 

This adds to the fact that failure could lead to an expensive, late-paying council tax bill.

What will be the police response?

If you are looking for a new valuation of business rates after April 20,23, the second-home owner will need to show evidence that their property has been let.  

According to the government, they will inform the public about the method of collecting evidence prior to the implementation of the new rules.

But, it is likely that this will include the property being advertised on rental websites and proof of guest payments.  

Boulger states that ‘evidence of lettings’ will be needed, including at least one brochure or website used to promote the property, letting details, and receipts. 

If you are already paying business rates for your holiday home or second home and meet all the requirements to be able to submit, there is no need to send anything. 

But they must ensure they have documentation of their last year’s lettings by April 20,23. This is because the VOA could ask them anytime. 

Boulger says that the only effect the new regulations will have on real holiday lets properties is the requirement to present the evidence. However, this information should still be available for owners’ tax returns. 

How about if family members and friends use the property?

The new rules could make it impossible for those who give their homes to family members and friends free of charge to be registered as small businesses. 

According to the government, lettings must be counted within the period of 70 days on a commercial basis at market rates. It also states that friends and relatives letting their homes at nominal or zero rents won’t be covered. 

No more mates rates? Money will need to change hands when the property is let, or it will not be counted as a holiday letting under the government's new 70-day rule

You can no longer pay mates rates If the property is to be let, money will have to move or it won’t count as holiday letting according the new government 70-day rule

This is not a problem if you have 70 commercial lettings in addition to the discounted ones for friends and family.  

Boulger states that even though they have to pay a fee for listing on their website, owners can still rent out to other people at a slight discount. 

He says that the owner should offer a discount of up to 20% to friends and family if they are able to avoid paying the usual commission to sites advertising their properties.    

How do you define the English rules?

Since 2010, similar laws have been in place in Wales regarding holiday rentals. The new law will apply the same principles to England.

After a Barclay Review consultation, the Scottish government has also decided to require holiday rentals for 70 days. They will be available for 140 days for a year. 

These rules will come into effect on April 1, 2022. 

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