A few years back, there were headline news stories of people “flipping” their second homes to avoid paying tax on the sale.
This switch in use allowed owners of second homes to take advantage of the rules for Capital Gains Tax. In a similar manner, owners of holiday homes can avoid paying rates altogether by arranging the use of the second home to take advantage of rates relief through eligibility for Small Business Rates Relief.
However, last year, the government announced there was to be a consultation on the use of holiday lets. It is looking to tighten up the system to prevent owners of holiday cottages and second homes from exploiting this relief system.
The aim is to ensure that holiday home businesses can demonstrate their eligibility for business rates, and the relief that can come with it; while also making sure second home owners are contributing to the local economy through paying council tax.
But is this the whole story?
The Flipside to Business Rates
There is a flipside to this issue, which is whether genuine holiday home owners are taking full advantage of what business rates can offer them?
For some, owning a holiday cottage does not feel that much like managing a business. This approach can means they end up paying council tax, if they have not looked carefully enough at their business and its eligibility for business rates.
It is a question, then of perspective. Yes, those owners of second homes who are effectively playing the system should come under closer scrutiny; but there are people who need to do the opposite, and run their genuine holiday home businesses more carefully, examining and exploring all their rating options.
Also, in many instances, owners might be entitled to significant council tax rebates, potentially in excess of £10,000.
Business Rates and Holiday Homes
There are advantages in ensuring a holiday home or cottage comes under business rates, and these start with its rateable value.
If the property is valued under £12,000 it is eligible for Small Business Rates Relief of 100%, providing it meets certain criteria.
Business rateable values are centred on rents. They are based on how much a tenant would pay a landlord. For a commercial property, for example, the tenant might be the company occupying a certain number of offices in a block.
In the case of a hotel, its rateable value takes into account the value of the rent paid to the landlord AND the profit accrued from running the business.
However, with almost all holiday home lets, in fact there is no third party paying a rent to the owner, which means they could be over-valued for rating purposes.
This makes the rateable values of holiday homes, upon which business rates are based, worth challenging. In many cases they should be reduced.
In other words, for holiday home owners, running them as a proper business, taking the business rates route should be a win-win: they may be eligible for 100% rates relief; but they might be able to get their rateable value reduced anyway for technical reasons.
For more information, please contact our team.