HM revenue council tax

HMO council tax: how it works and why it might be changing

The quality of HMO accommodation across the UK has been improving drastically, but council tax bands can be inconsistent within the sector. 

A consultation by the Department for Levelling Up, Housing and Communities seeking views across the industry on the way homes in multiple occupation (HMOs) are treated when it comes to council tax closed at the end of last month.

Landlords from within the buy-to-let sector, among other interested parties, were invited to respond on whether they wanted the Valuation Office Agency (VOA) to change the way it values an HMO for council tax, and the outcome of any changes could be a boost for an already thriving part of the rental market.

At present, while many HMOs are simply given one council tax band to determine the amount due, the VOA can actually split a property up for tax purposes. This leads to multiple bills for one dwelling, which can be confusing, expensive and off-putting for the owner.

One major issue, which is reiterated in a response from the National Residential Landlords Association (NRLA), is that this is often applied inconsistently in different areas. It can make the bill more expensive for the owner/landlord, who tend to pass this cost onto tenants.

How does council tax for an HMO work?

Across England, council tax is applied to the vast majority of residential premises as a way of funding local services. Each property is placed into a different band, based on what the property would have been worth on 1st April 1991, even if it was built after this date, and each band has its own annual fee.

It becomes more complicated when there are multiple dwellings in one space, such as a house converted into flats, because each will have to be reassessed to decide which council tax band applies.

HMOs, which house multiple tenants with shared facilities, often with separate tenancies, may sometimes just have one tax band for the whole property. Generally where there are separate tenancy agreements in place, the landlord is responsible for the council tax bill because the tenants only take on responsibility for a room.

But if there is a joint tenancy agreement, where they all share responsibility to rent the whole place, tenants tend to take responsibility for all the bills, including council tax. Individual landlords sometimes offer a bills-included agreement, though.

Issues with valuations

Referring to the fact that some cases, the VOA is issuing multiple separate bills to single HMO properties, the NRLA wrote: “The VOA has wide ranging discretion to do this, as the bar for disaggregating a property is very low.

“Under the current rules, if a landlord lets a property by the room, even if the rooms are not self-contained in any way, the VOA will usually have enough to justify creating multiple council tax bills.”

Where this happens, it could mean the tenants then become responsible for paying the council tax applied to their room in the house. Where rooms are empty, such as during a void period where a tenant has moved out, this cost falls to the landlord, increasing their overall costs.

The danger is that anyone letting out a property on a room-only basis could be assessed and re-banded by the VOA.

What could happen?

As the Department for Levelling Up, Housing and Communities points out, “there is a risk that legislation has not kept up with the improvements in the quality of HMO accommodation and how such properties should be treated for council tax”.

The idea behind the proposals is that the HMO sector would be given greater certainty, by removing the possibility that the VOA could issue separate bills and increase the overall cost – and decrease profitability – of an HMO property.

Depending on the response to the consultation, the government hopes to “deliver a framework which will ensure that HMOs are valued as a single dwelling other than in exceptional circumstances”.

The HMO sector has transformed in recent years into a much more desirable rental option, as well as a potentially more lucrative buy-to-let business than smaller properties, so any improvements to the way it is taxed could be welcome news to a lot of landlords.

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