Loophole Cottage

    1 December 2018

    I have a faint memory that I once came across a property called Loophole Cottage. It was named, I think, because it incorporated a narrow window in the style of a castle — a loophole, as it is known to historians of medieval architecture. But then again it may have been that the owner was sitting smugly by the fire, rubbing his hands because he had worked out a way to avoid paying council tax on his second home.

    If so, he might not be feeling quite so smug now, after Philip Hammond announced in his budget that he is launching a consultation as to whether this particular loophole should be closed. It works like this: a property that has a reasonable complement of furniture is available for letting for short-term lets for a minimum of 210 days a year, and is actually let for a minimum of 105 days, qualifies as something Her Majesty’s Customs and Revenue defines as a Furnished Holiday Letting (FHL). As an FHL, the property will be liable for business rates rather than council tax. But if the rateable value is less than £12,000, and you don’t own an entire street ful of holiday properties, your FHL may also qualify for 100 per cent business rate relief. Result: you pay nothing.

    Unsurprisingly, local authorities are a bit upset about this. It has become the latest front in the war against second homes. Cornwall Council, which has 8,000 properties registered as FHLs, reckons that it is losing £10 million a year. Worse, many councils believe that many of the properties qualifying for business rate relief are not really holiday lettings at all — they are plain and simple second homes. The rules are difficult to enforce. What does it mean, that a property must be available for letting for 210 days a year? One could, after all, set up a free website with a blurry picture of one’s cottage in the pouring rain, set a price of a couple of thousand a week in low season and an email address for inquiries. Would any holidaymaker actually bother you? As for the demand that the property is actually let for 105 days a year, is any council going to bother to send a revenue official up to the middle of Dartmoor, or wherever, in order to count holidaymakers in and out?

    The government has already fired a broadside at second home owners (as well as buy-to-let investors) by levying an additional 3 per cent stamp duty on properties not bought as a main home. Has it worked as a deterrent? Not according to the Resolution Foundation which last year claimed that 5.2 million Britons own a second property, a 30 per cent increase since 2000. Perhaps not surprisingly, given the difficulties faced by young people buying a first home, only 3 per cent of second home-owners were born since 1981. The days of middle-class families buying a seaside bolthole for the children seem to be pretty well over.

    But if second homes are a problem, there is also evidence that it may not be quite as big a problem as the Resolution Foundation study suggests. For one thing, it doesn’t say whether it distinguishes between second homes in Britain and those abroad. Many of those 5.2 million Britons may well have their second homes in France or Bulgaria. If that is a problem, it is one for French and Bulgarian authorities to resolve, not the UK government. The 2011 census certainly gave a much lower figure — suggesting that 1.57 million usual residents of England and Wales had a second address in England and Wales, and a further 47,000 had a second address in Scotland or Northern Ireland. However, only 11 per cent of second home owners stated that theirs was a holiday home. Another 12 per cent stated that it was for work and the remainder put down ‘other’. The Department of Communities and Local Government (DCLG) counts the number of second homes as opposed to second home-owners. This reveals that in 2013/14 there were 744,000 properties in England used as second homes.

    But these are not necessarily owned by wealthy individuals who turn up every other weekend, then shut the place up and drive off. Many will be genuine holiday lets without which the tourism industry would struggle. Moreover, many will be owned by locals. Why are they any less deserving of business rates relief than people who run pubs, shops and other local businesses?

    There is a suggestion that the Chancellor will not, when it comes to it, eliminate business rate relief on furnished holiday lettings altogether. Instead, he may tinker with the qualifying rules, perhaps increasing the number of nights a year that a property must be occupied by paying guests. The easiest thing, indeed, might be to offer business rate relief through tax returns. Then, owners would benefit only if they were actually paying tax on their rental income. If you wanted to thwart the local authority by avoiding business rates, in other words, you would have to declare rental income to the taxman — which, if you are not actually letting the property, is no tax break at all.