Landlords could be hit by covert tax hikes

by Robert Powell on 31 October 2011  |  17 comments
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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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