If you let out a property, are you running a business or managing an investment? Provided you are making money you probably don’t care about what seems to be a theoretical distinction. But it does matter for one very important reason: tax.
Generally speaking, businesses have a more attractive tax regime than investments, and for as long as I have been involved in tax the system has struggled to draw a clear distinction between the two where property is involved.
Some areas (such as furnished holiday accommodation) have statutory tests, but others (such as Inheritance Tax relief) don’t have hard and fast rules and ultimately it is for the courts to decide, on a case by case basis, which side of the line a person’s activity falls.
There is another tax aspect to this: business rates. Second homes generally attract council tax (the level and the extent of any rebates depends on individual local authorities) but many short-term rental property owners have registered as businesses, thus bringing them into the business rates regime instead.
Until recently this would have been costly but reforms to business rates, particularly the introduction of the small business rate relief, have meant that many such property owners have been able to escape both business rates and council tax. The Government has estimated that 96 per cent of short-term let properties in England which are registered for business rates are entitled to 100 per cent relief.
The Government has launched a consultation on the business rates treatment of self-catering accommodation in England to tackle what it sees as an anomaly. Under the current guidance all that is required is that the property is made available for letting for 140 days per year. But there is no requirement that it is actually let. So somebody could make little or no attempt to advertise a property, or charge a rent which is much greater than the going rate. That way, a second home could be used exclusively by friends and family and still qualify for business rate relief, even though it was never actually occupied by a paying guest.
The document suggests that the test will be tightened up and that the property must not only be available for commercial let but actually let out on commercial terms for at least 70 days, in order to qualify as a business. If it didn’t meet the test it would fall back into the normal council tax regime.
We can see why the Government wants to tighten up the rules and we don’t have strong views about the detail of the proposed test itself. But we would urge the Government to take the opportunity, so far as possible, to create a consistent set of rules across all areas of tax so that property owners know exactly where they stand. Property owners need to concentrate on providing the best service to their tenants and shouldn’t have to worry about which side of a wholly artificial line they fall.