We must close the second home tax loophole that’s pricing people out of their own communities
Sian Gwenllian, Plaid Cymru AM for Arfon
There’s a secret scandal going on in Wales – and it’s causing serious inequality.
Currently, because of a loophole, a great number of second-home owners can avoid paying taxes.
By registering their second-homes as small businesses, these owners can not only avoid having to pay council tax but they also receive full business rate relief.
This anomaly in the system, which has gone unchallenged for too long, is a scandal.
Second home ownership is at the heart of widening wealth inequality. Research shows that nine in ten additional property owners are in the top half of the wealth distribution. But in Wales, second home owners have found a way to save money!
The problem lies with Section 66 of the Local Government Finance Act 1988. This Act allows second home owners to transfer their properties out of the council tax system if they let their properties as self-catering accommodation for short periods of the year.
The problem is widespread.
There are five thousand second homes in Gwynedd – one of the largest numbers of second homes in Wales, whilst almost two thousand people are on the waiting list for social housing in the county.
Local people are being priced out of the housing market, causing a crisis in many of our communities. Gwynedd Council is anxious to mitigate this and second home owners are required to pay an extra premium on their council tax. This applies to second home owners in other parts of Wales under powers granted in 2014. In Gwynedd, the tax that is being raised in this way will be spent on much needed affordable and social housing.
But second home owners have found a way around paying council tax. Over 1000 of the 5,000 second home owners have found the anomaly in the system. They have transferred their businesses out of the council tax regime and into the small business rates regime. Because their ratable value is small, the vast majority of second home owners don’t pay any business rates at all.
My surgeries are often full of people living in unacceptable conditions in private rented accommodation that is damp, too small or expensive to heat, leading to fuel poverty. Other families have to share homes with their parents or other relatives or friends. There are too many people in homes that are too small for their needs, and this in turn impacts their general well-being and the education of the children also suffers.
There is something wrong with a situation where two thousand people are living in poor conditions whilst one fifth of second home owners are playing the system for their own benefit and avoid paying council tax.
A total of over £1.7 million per year is lost in Gwynedd alone – as well as the council tax premium, which would bring additional millions. Money that could be an important contribution towards building more appropriate housing for local people in Gwynedd.
And it isn’t just Gwynedd.
This is a problem throughout Wales because the funds lost due to this loophole do not just effect authorities where second homes are most prevalent, but effect all authorities across Wales.
And arguably, by letting this happen, the Welsh Government, is simply putting money in the pockets of second homeowners rather than using that money to improve the lives of local people.
It is vital we close the loophole in the tax system.
But how do we do that?
The simplest, most straightforward and transparent answer in my mind is to adapt the Local Government Finance Act 1988.
This is something that the Welsh Government has the powers to do through secondary legislation. By removing the current criteria related to self-catering units as set out in section 66 and replacing it with a principle that every property that is used as a domestic property should remain as a domestic property, whatever its use, we could close the loophole. This would not affect self-contained self-catering accommodation provided commercially which is not covered by section 66 of the Act.
Changing planning policy is another way of tackling the issue.
Almost every building has a designated use, or class of use, already and if the owner wants to change this they have to apply for permission. So, we could expand the category of “residential” within the planning system, so you have to apply to change it between owner occupied, private rented or second home rather than the current situation where ‘residential’ applies to all of those.
This would allow local authorities to ensure the proper tax was applied to each property, as well as being able to maintain and restore balance within communities.
Far more needs to be done to help families who are priced out of the market by the existence of an increasing number of second homes. This is causing a housing crisis in many communities in Wales. Second home ownership is at the heart of widening wealth equalities. The anomaly is the system in Wales needs to be removed – once and for all.