Government closes tax loophole on second homes

However, where a property is considered to be used predominantly for self-catering accommodation purposes - so as a holiday let - then it may be valued for non-domestic rates (‘business rates’) instead.

According to Government figures, there are around 65,000 holiday lets in England, up from 50,960 in 2019. Many of these properties (around 97%) are likely to qualify for small business rates relief, which provides 100% relief from business rates – meaning no tax is due on properties with a rateable value of £12,000 or less, provided the business uses only one property (though relief may still be available under certain circumstances). For properties with a rateable value of £12,001 to £15,000, the rate of relief decreases gradually from 100% to 0%.

While the Government takes a positive approach to holiday lets by encouraging individuals to take an entrepreneurial approach (as long as it is safe and legal), it is concerned that owners of properties that are not genuine businesses may reduce their tax liability by declaring that a property is available for letting without making any real effort to actually let it out. This has raised concerns that many are unfairly benefitting from the tax break even though the property is often left empty.

On 14 January, the Government issued a press release which states that those who abuse this tax loophole, by claiming that their often-empty properties are holiday lets, will be forced to pay under tough new measures. This follows on from its announcement on 23 March 2021 (“tax day”), in response to consultation that it launched back in the November of 2018, that it would legislate to change the criteria to account for actual days the property was rented.

In the 14 January press release, Secretary of State for Levelling Up Rt Hon Michael Gove said:

“The government backs small businesses, including responsible short-term letting, which attracts tourists and brings significant investment to local communities. However, we will not stand by and allow people in privileged positions to abuse the system by unfairly claiming tax relief and leaving local people counting the cost. The action we are taking will create a fairer system, ensuring that second homeowners are contributing their share to the local services they benefit from.”

The Government will make changes to the tax system which will mean second homeowners will be required to pay council tax if the property is not a genuine holiday let.

From April 2023, a property will only be assessed for business rates rather than council tax if the owner can provide evidence that:

• it will be available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days in the coming year;
• during the previous year, it was available for letting commercially, as self-catering accommodation, for short periods totalling at least 140 days;
• during the previous year, it was actually let commercially, as self-catering accommodation, for short periods totalling at least 70 days.

Property owners will also have to provide evidence such as the website or brochure used to advertise the property, letting details and receipts.

Currently there is no requirement for evidence to be produced that a property has actually been commercially let out.

These changes are intended to target those who take advantage of the system to avoid paying their fair share towards local services in popular destinations such as Cornwall, Devon, the Lake District, Suffolk, West Sussex and the Isles of Scilly.