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Colliers has described the UK business tax system as “broken”. The government is losing out on millions of pounds in council tax revenue because second property owners benefit from business rates cuts.
Under the latest regulations, property owners can choose to claim they are a small business and pay business rate instead of council tax if they let their property out as a holiday let for 140 days per year, and commercially as self-catering accommodation for short stays of 70 nights or more.
Small businesses can apply for a 100% reduction in the business rates payable if their property has a taxable value of less than £12,000. Properties with a taxable value between £12,000 and £15,000 are also entitled to a graduated reduction in line with the current business rates relief policy.
Colliers estimates that the total loss to the Government from business rates relief on holiday rentals in England and Wales is currently around £172 million per year (2024/2025).
John Webber, head of business rates at Colliers, said: “The measures now in place are tougher than before, but they are not enough to stop second property owners ‘rolling’ onto the business rate list and reducing local authorities’ ability to collect funds.”
“Local authorities appear to have been successful in getting some properties back on the council tax list but it’s still not enough. Second homeowners can now rent out their properties for just 10 weeks a year, thus avoiding paying business and council rates.”
“The fact that the number of properties subject to business tax remains so high is proof that the measures are not working.”
The problem is worst in Cornwall, where 11,259 holiday rental properties are classed as holiday rentals and non-residential and therefore do not pay business or council rates. If these properties paid council tax, it would generate more than £26 million in extra revenue each year in Cornwall alone.
Mr Webber fears current policies on second homes could make the situation even worse, unless reformed by the new Labour government.
Under the Equalization and Regeneration Act, local authorities have the right to levy double council tax on second homes, which are defined as “furnished and for personal use but not a main residence”.
The policy is driven by a desire to reduce the number of holiday homes and reserve more housing for local residents.
Cornwall Council has announced that it will impose a 100% council tax surcharge on second homes from 1 April 2025, and latest reports suggest that more than 150 local authorities have also announced they will impose the same increase next year.
This will affect more than three-quarters of second homeowners in England who will be subject to double council tax in 2025, affecting as many as 130,000 properties.
“As council rates rise, there will be even more incentive to convert properties into business rate properties, with some local authorities considering increases of 200-300 per cent,” Mr Webber said.
He added: “If Cornwall Council thinks ‘tripling’ council tax on second homes is the answer to deter second home owners and solve the local housing crisis then they are living in ‘wishland’.”
“Double or triple taxation or no tax at all will only encourage more people to switch from council tax to business tax.
“And even if some second home owners are deterred, sell up and leave the area, local residents are unlikely to be able to afford them, which will hurt the local businesses supported by these owners and their properties, further reducing tax revenue.”
There are currently over 79,874 holiday lettings on the Business Tax List in England and Wales which are eligible for 100% business tax relief and do not have to pay business rate or council tax.
The burden of council tax falls disproportionately on residents and other types of businesses who are struggling to pay council tax, which rose again significantly last year.
Mr Webber said: “Local authorities may in some sense be compensated by central government for lost council tax, but the key point is that less money will be collected locally, which means less money to spend on services and affordable housing that local people actually need.”
“Politicians love to quibble about the lack of social housing in places like Cornwall and demonise people who buy second homes. But if Cornwall Council was able to charge holiday rental owners the same or more tax as council taxpayers, it could have generated over £100 million in extra revenue in the last four years alone which could be used to build affordable homes across the county. The problem isn’t second home owners, it’s that politicians don’t understand the problem and don’t have the courage to do something about it.”
“Threatening homeowners with punitive council tax increases is not going to solve the problem in the long term.
“Three years ago, the government’s revenue losses were estimated at £110m, two years ago it was £150m and last year it was £170m. This year the figure is £172m. These losses have been building up over many years and there is an increasing need for the government to bail out local authorities. The new government must reform the whole system, and do it over and over.”