HMOs: landlords face huge increases in Council Tax bills

Councils are getting HMOs revalued, and hiking the tax bills landlords pay in the process.

Increasing tax costs are a concern for everyone at the moment.

With life becoming ever more expensive, the prospect of higher National Insurance contributions ‒ through the Government’s Health and Social Care levy ‒ is going to impact the financial health of millions.

It’s certainly not the only tax change that is causing pain though, with new reports of a tax shift that is leading to landlords seeing their Council Tax bill multiplied many times over.

Investing in an HMO

The issue centres around properties which are known as houses in multiple occupation (HMO), large homes which are let out by the room.

Tenants then share some communal areas in the property ‒ a perfect example is a student property, where you might have a handful of different tenants each on their own tenancy agreement, but for what is classed as a single property.

HMOs have become somewhat more common, and with it more popular, with investors in recent years.

One obvious reason has been the returns on offer, which have been significantly higher.

For example, a study by mortgage lender Foundation found that in the third quarter of last year (the most recent period) HMOs provided investors with an average yield of 7.2% on their outlay, compared to 7.2% for investments of other types.

HMOs also provide some extra protection against defaults and void periods.

With a regular property investment, if your tenant stops paying, then the property stops making you any money.

That isn’t the case with an HMO ‒ if one tenant stops paying, there’s likely a handful of others who are still paying, limiting the damage.

Tax hike

However, investors with HMOs are reporting being hit with a massive tax hike.

Previously, HMOs were viewed as a single property when it comes to Council Tax.

However, reports in the Telegraph have highlighted the experience of landlords whose properties have been reclassified, so that as far as the tax is concerned each room is effectively a different property.

As a result, landlords are seeing their Council Tax bills jump many times over. One landlord who spoke to the Telegraph said his bill had risen from £1,821 a year to £7,287, for example. 

Why is this happening?

There is a simple answer to this one ‒ money. Councils have seen their funding slashed by central Government in recent years, but still need to cover the cost of the various public services they provide.

And milking landlords for a bit more cash seems as good a way as any of raising some additional funds.

It’s worth highlighting here that councils don’t classify the properties themselves ‒ instead they task the Valuation Office with determining whether HMOs should be classified as single or multiple properties.

However, according to property industry experts this is becoming far more frequent, with increasing numbers of landlords facing significantly larger Council Tax bills than expected.

That then leaves them three options ‒ absorb the costs themselves, pass them on to the tenant, or sell up the property entirely.

Is this really a bad thing?

There will inevitably be some who think this situation is great, since it makes life harder for landlords.

If properties become less profitable, then investors are less likely to keep backing it, making it easier for normal homebuyers to get on or move up the ladder. That’s the thinking, anyway.

Not everyone agrees though. Penny Mordaunt, the Conservative MP, has cautioned that this “arbitrary” system is threatening housebuilding since developers won’t build properties that could work as HMOs if investors aren’t going to buy them.

Of course, this could mean that they instead focus their efforts on properties more suitable for regular homebuyers than investors.

We will soon see just how badly this tax situation impacts landlords, and whether it ultimately benefits or hurts the prospects of homeownership for first-time buyers.