Landlords could be hit by covert tax hikes
The government has announced proposals to end tax breaks for second home owners. But, as Robert Powell reports, this change could be set to unfairly punish landlords while only marginally hitting the wealthy...
Tax breaks for second home owners could be axed under new proposals put forward by the government.
The coalition has presented these plans as a levy on the well-off designed to bring down council tax levels for everyone. And indeed, the move has been trumpeted by many as a welcome/risible (depending on which paper you read) attack on the wealthy.
But in reality, it could be landlords that end up unfairly punished by the plans - while those wealthy home owners that the government says will suffer, will actually get off with relatively small tax increases.
‘Major shake-up’
The core proposal in this ‘major shake-up’ is to allow councils to end the tax discount given to second home owners. Currently, councils are obliged to offer a discount of between 10% and 50% on the council tax of second homes.
According to the Guardian this move will “affect nearly a quarter of a million people, forcing them each to pay hundreds of pounds more a year in council tax”.
The message coming from Whitehall is similarly grandiose: “Second homes currently receive a discount of up to 50% on their council tax bill, leaving local people struggling to pay the bills.” Unsurprisingly, a backlash is expected from some Conservative MPs who claim that middle-class second home owners will be hit hard by the change.
But when you look at the figures, this move is less a devastating knock-out blow for second home owners and more a smooth PR move by the government.
10% tax uplift
Councils can indeed offer a full 50% tax discount to second home owners. But in reality, they rarely do. Not one of the ten councils with the highest numbers of second homes offers any more than a 10% discount to these homeowners.
That means that, under these new proposals, council tax for most second homes would only increase by one tenth. That’s around £10 per month on average.
As I said, less a devastating, redistributive move against the wealthy, more a PR tactic employed by a government (and department) eager to prove that they are in touch with the normal, single-home owning person.
In fact, the proposals could have an unintended and indeed unfair consequence for another group of property owners.
Covert landlord tax
When a rental property is occupied, council tax is obviously paid by the tenants. However when it is left unoccupied between tenancies or for refurbishment, the law is less straightforward and varies between furnished and unfurnished properties.
For landlords with furnished dwellings, council tax is payable if the property is left empty between tenancies. In fact, the law would revert to the second homes discount, meaning that a landlord would be eligible for a discount of between 10% and 50%. But as I considered earlier, most councils opt for the minimum 10% discount on second homes.
However under these new governmental proposals the 10% discount would be axed. This would mean that landlords with furnished properties would be liable for the full council tax bill of their buy-to-let home if it was left empty between tenancies.
This is perverse and unfair when you consider that a 25% discount is available for homeowners who simply live alone.
Repair work
Landlords with furnished properties can currently obtain a council tax discount if they are undertaking major repair work. However each council’s definition of ‘major repair work’ varies, with many limiting the discount to properties undergoing structural renovation.
So if a landlord intended on repainting their property or installing new plumbing while it was empty – work that would obviously prevent tenants from moving in – they often still have to pay council tax at the 10% discounted rate.
The current law thus encourages landlords to move in new tenants straightaway, rather than refurbish periodically and enhance the quality of the rental property.
By axing what little council tax discount landlord-owners of furnished second homes have at the moment, the new proposals will contribute to this effect.
In other words, it’s likely that the standard of rental properties in this country will decline further if the proposals are made law.
So it’s bad news for tenants and neighbouring property owners, as well as landlords.
It gets worse...
Landlords with unfurnished properties are currently granted full council tax exemption if their property is unoccupied for less than six months or undergoing major repair work for less than 12.
The new proposals take aim at these two loopholes and suggest that instead of a mandatory 100% exemption, councils should be able to give discretionary discounts of between 0 and 100%.
This means that potentially a landlord renovating an unoccupied and unfurnished property could be forced to pay a full council tax bill.
Again, this is likely to put many landlords off refurbishing their property.
Consultation stage
It’s important to point out that these government proposals are currently only in the consultation stage. Hence there could be major changes to the plans before they are turned into policy. And if you’re a landlord, you should be hoping that there will be.
But just to end on something resembling a positive note: a number of the proposals put forward by the government in this paper should be welcomed.
In a country with such a shortage of housing, swathes of unoccupied properties are unacceptable. That’s why additional proposals to enforce a council tax premium on homes left empty for long periods of time (rather than a 100% exemption) are admirable and long overdue.
Indeed, even the core proposal to axe discounts on second homes is a welcome one. If someone can afford a second home, they can afford a second full council tax bill.
We can only hope that landlords don’t become the unexpected victims of this faux-war on greed.
What do you think?
Are these proposals a good idea?
Have your say using the comment box below.
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I am a widow who was looking at a way of raising some funds when I retire so that I can still contribute to society by paying tax on my earnings, as I have done so far, whilst at the same time paying my way. I was thinking about buying a property to let but with these latest announcements re: changes to council tax I will probably not do it as I don't want to have the extra burden/worry of perhaps not being able to rent the property and paying even more council tax. I don't mind people on their own having a rebate as if, for example, two people live in a property they pay 50% countil tax each but a person on their own pays 75% of the council tax. It seems to me that at present the more you try to contribute to the country the worse off you are. We need to be encouraging businesses and they need CUSTOMERS. If you keep taking money away from people then they won't spend and so businesses will go to the wall. Hardly a good thing for the economy. Instead of altering council tax rates may I suggest that as a way of the country saving money, given that we are not to have a referendum on belonging to the EU, we can Permanently Disband the House of Commons (their is an e-petition on this should you want to vote for it) and just let the Euro M.P.'s earn their money by governing Britain - thus saving all those M.P.'s salaries, expenses etc (after all, the House of Lords could look after what's left) and even if you vote for an M.P. your vote won't count anyway as you will be governed by Europe.
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All the councils in Wales have already stopped giving any discount on empty furnished homes. My daughter is working away and becomes a "second home" owner. She wouldn't mind paying the 75% of council tax but because she was honest and declared the house empty she now has to pay 100% and helps the council meet the shortfall on those that don't pay. Why be honest?
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Lots of false data being bandied around here: 1. There aren't 800,000 empty homes: the statistics are stupid because they include houses that are defined as "empty" even if someone has gone abroad to work for 3 months, or someone has died and the estate is still going through probate, or someone is trying to sell their house after moving for reasons of work or starting a new live-in relationship, or because a builder is seeking planning permission to renovate or extend a beaten-up old house. I'm a small builder and recently renovated a house that had been left uninhabited for three years because the owner fell ill/went barmy and claimed the house was contaminated with nuclear waste. He moved his family out and made them live in a caravan in the garden, he was repossessed, then squatters broke in and trashed the place - graffitii, internal walls partially knocked down, buckets of excreta left in a room, you name it - until I bought it and refurbished it. For that period the house was empty but it clearly wasn't because of some evil money-grubbing landlord waiting for the capital value to rise . . . The Empty Homes officer at Reading borough council has sent me a list of all the empty properties that contribute to this 800,000 figure, and the vast majority are empty for less than 6 months at a time, mostly because the owner is away/abroad, or the property's being refurbished/demolished, or it's up for sale. He admits the actual number of properties that are genuinely long-term empty and could in practice be refurbished and rented if the owner chose and had the capital are about 5% of the total. 2. First time buyers are crying because buy-to-let landlords have supposedly pushed up prices and are stopping them from buying. Utter rubbish: landlords are a tiny sector of the market and tend to buy 2-3 bedroom properties in university towns, not 1-2 bedroom starter units. The vast majority of landlords only own 1-2 properties, often accidentally because a parent dies or they enter a new relationship and move into their partners' house or flat and decide to keep the property as an investment. Why is this wrong? Why shouldn't people borrow to let if they have the money and are prepared to accept the very poor returns and do all the hard work? The fact is first-time buyers simply need to work with the market, save harder, and if necessary if you can't beat then, join them, i.e. there is nothing to stop a first-time buyer buying a house as a buy-to-let landlord. That way there's no income multiple provided you earn over £25K: all you need is a 25% deposit and proof that the house will rent for 130% of the mortgage interest, not difficult with today's low interest rates. I bought my first house at the age of 34 in 1996 and could not afford to live in it myself: I'd saved and saved to get a deposit, my mother chipped in 5%, and I bought the house as a rental investment whilst I rented elsewhere in a houseshare. I did the property up, helped by my tenants in exchange for a lower rent, and was ultimately able to move into the property, keeping a couple of the guys as lodgers, and eventually they moved on and my new partner moved in. The point is, it wasn't easy to buy a house for the first time in 1996, and it isn't easy now. No-one had a god-given right to own a house: you have to earn it, and earn it on top of your everyday salary. House prices now average 4.3 x earnings; the long-term average is 4, so prices are not over-valued by much and there's a much stronger culture of renting, so homebuyers will find it easier to take in lodgers or if necessary rent out the whole house until they can afford to live it alone or as a family. The main problem is raising the deposit, so people have to decide how much they really want a house, and save like mad, do extra jobs, take out loans from family, etc. 3. As regards council tax, an insidious feature is the way houseshares have to be all-benefit or all-student to benefit from the 0% discount. If you have one working person in a household of four, he or she will have to pay the whole council tax, less 25% single person discount. Working people bitterly resent if there's one student or person on benefit in a houseshare, because they have to cover their share of the council tax. It's a stupid system and makes it even harder for people on benefits to find housing because no-one wants them in a working household.
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08 November 2011