The council tax attack on second homeowners won’t solve local authority funding

If its serious about tackling business rates, one area the new government must look at it is its holiday lets/second holiday homes policy.

The current law allows property owners who make their properties available to rent as holiday lets for 140 days of the year and let them for short periods of 70 nights or more means they can claim they are a small business and flip from paying council tax into the business rates list. If they have a rateable value (RV) of less than £12,000 a year they can then claim 100% business rates relief on their property or receive relief on a sliding scale if their RV is less than £15,000. This means many pay little or nothing at all in local taxes –  an issue we have been highlighting for years.

This is most acute in Cornwall where currently 11,259 holiday let properties do not pay either business rates or council tax, due to being classified as non-domestic. We estimate that if these properties paid council tax, over £26m of extra income would be raised annually in Cornwall alone to support local services. Taking the South West of England 23,412 properties on the list claim 100% business rates; depriving their local councils of over £55m a year.

And while currently local authorities may be compensated by central government in some respects for these losses in council tax, the central pot is not a “magic money tree”. Less money is collected locally meaning there is less to spend on services or on affordable housing that local residents need.

The previous government tried, through tighter regulation, to reverse this trend of “flipping” to the business rates system to avoid paying any tax and some local authorities seem to have managed to return some properties to the council tax lists. But the numbers are too low.

And current government policy towards second homes could make the situation worse. Under the Levelling Up and Regeneration Act, aimed to reduce the number of second homes, freeing up more housing for locals, local authorities were given the right to charge double council tax on second homes, which it defines as “furnished, for own personal use but not a main residence”.

Cornwall Council has since announced it will charge an additional 100% council tax premium on second homes from 1 April 2025. More than 150 local authorities have reportedly announced the same, impacting more than three quarters of England’s second homeowners who will be charged double council tax in 2025, affecting as many as 130,000 properties.

This policy won’t work. Doubling or tripling council tax will just encourage even more people to try to flip from council tax to business rates. And even if some second homeowners sell up and leave the area, locals are unlikely to be able to afford such housing in any case. Local businesses that were supported by these owners and their properties will also suffer, depleting the tax take further.

Politicians bicker about the lack of social housing in places like Cornwall and portray people buying second homes as the villains. Yet if Cornwall Council had been able to charge holiday let owners at least the same as a council taxpayer they would have received over £100m of extra income in the last four years alone, to be spent on building affordable housing in the county. The problem is not second homeowners, it is politicians failing to understand the issues and having the courage to do something about them.

Three years ago, we estimated the loss of income to government was £110m. This year the figure is £172m. Such losses have mounted up over the years, with the government increasingly needing to bail out local authorities. The new Labour government should reform the whole system and do it thoroughly.

John Webber is head of business rates at Colliers