We must close the second home tax loophole that’s pricing people out of their own communities

Abersoch. Picture by Ken Doerr (CC BY 2.0)

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.

 

Powers

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.

Removed

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.

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John Rees MossMawkernewekRobin ReidRhosdduJonathon Gammond Recent comment authors
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Ian Williams
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Ian Williams

There are rules regarding qualification for this system, covering length of time the property is available and number of weeks actually let. Do the Inland Revenue actually police these elements? I suspect not. This is not to suggest the whole system does not need overhaul.
Drop into any on site caravan sales office , the first question ‘are you a tax payer’, followed by ‘would you like a tax rebate’. Under the same tax system, we are subsiding caravan ownership.
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Richard Penderyn
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Richard Penderyn

Someone was arguing with me that any regulations on second homes dominating local communities would detrimentally restrict inward investment ………. so how come many areas dont need second holiday homes to garner inward investment …… rural Wales is basically reduced to accepting crumbs with many enchained caveats

Ben Angwin
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Ben Angwin

‘Tai haf’ (summer homes / 2nd homes) are a meaty issue, and must be bridled, but landlords and tai haf are lone parts, not the same.

Cash from land and rent gives each citizen a ladder to climb as both a shield against petty tyranny and a road to freedom on his or her own terms, not the terms, aims nor alms of clubs, groups, parties or creeds.

Ian Williams
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Ian Williams

Not an issue as long as there is no subsidy through the tax system as currently. Mortgage interest relief has long been removed, yet here we are providing the same relief on interest payments in respect of second homes. Logic?

Sibrydionmawr
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Sibrydionmawr

Quite simply, rent is theft because property is theft, and no amount of liberal apologism for rank capitalism will ever change that.

Huw Davies
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Huw Davies

This matter has been talked about for ages yet no action. Which of the members at Y Cynulliad have a vested interest in this ? Someone is stalling progress and resolution.

Owain Glyndwr
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Owain Glyndwr

Close the loopholes, or don’t. I would be interested to check back in 1-3 years time and see what has been actually done about this. I don’t regard it as very important. If poor people cannot afford to live in certain areas, then they should live elsewhere. I don’t agree with public monies being used to build houses for ne’er do wells. I personally know of an example a young Slovakian lady living in (Hereford) a single mother of two children, the most she has ever “contributed” is to work 16 hour a week, whilst claiming every benefit under the… Read more »

Sibrydionmawr
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Sibrydionmawr

You’re a nasty piece of work, aren’t you? And xenophobic too. I’m willing to bet that the young Slovakian woman working her 16 hours a week, (about as much as she could work, reasonably, when bringing up the next generation of workers – which is in itself valuable work and making a contribution towards society that quite literally is incalculable, is making far more of a contribution that you are, ever have, or ever will. That family also need a decent place to live, where the children have the space to thrive. You may call yourself Owain Glyndwr, but your… Read more »

Rhosddu
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Rhosddu

Having brought this up on a public forum, I would now expect Sian Gwenllian to raise thisissue in the Senedd ASAP. We’ll be watching. As for ‘Owain Glyndwr’s’ Slovakian scrounger, that’s a completely different problem from the Gwynedd situation where largely Welsh-speaking locals are unable to get a decent home in their own communities because such a large percentage of local homes have been given over to facilitating tourism. Radical measures, beyond playing around with the Local Government Finance Act, such as those propsed by Royston Jones elsewhere on this blog, are required to put a stop to this blatant… Read more »

pete
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pete

Its got nothing to do with wales this happens evrywhere its just that closet racist welsh nationalists use it as an excuse to Englsih bash….as they always do

Rhosddu
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Rhosddu

Norm! You’re back! Croeso i ti.

Huw Davies
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Huw Davies

I think he visits because he has a perverse liking for your responses. Touch of the “oh dear somebody noticed me”. I fell for it once but won’t bother again . Just bung him another minus -.

Rhosddu
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Rhosddu

Dw i’n meddwl fod ti’n iawn, Huw. Good advice.

Gaynor
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Gaynor

Not realky there are welsh people with second homes and buying houses to rent out as holiday home, so you cannot define this policy as racist

Robin Spreckley
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Robin Spreckley

This is a shameless and poorly researched piece of scapegoating propaganda. People who own houses that they run as holiday businesses are not “playing the system” to avoid paying council tax. That is a scurrilous and false accusation, intended to foster hatred. They are invited by the Welsh Assembly to apply for small business rate relief and have to prove that it is a proper business, that brings benefit to the community by providing quality tourist accommodation. This is a business like any other, requiring time, investment and attention to detail to make a success. The problem in these communities,… Read more »

Sibrydionmawr
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Sibrydionmawr

Holiday homes are a blight, and are unnecessary. make no contribution to local economies and are ultimately colonialist in nature. Two or three decades ago some activists had an idea that took off… Well. like a house on fire. Those houses were in ruins for a reason, and that’s because Wales is economically marginal, and why? Because of colonialism and economic exploitation that has left Wales, like most other colonies of England, poor. You so obviously aren’t from Wales, and haven’t even bothered to learn how to spell the name of the county where the plague is greatest – it’s… Read more »

Rhosddu
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Rhosddu

If you think tourism in its present form benefits Cymru you are greatly mistaken. for reasons that are now well-established.

Robin Reid
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Robin Reid

Yay, a sensible voice. We bought a second home/shop in our town in Gwynedd to be part if and contribute to the local community by hiring local managers and cleaners and promoting the arts year round. Tourism will always be a money maker for coastal towns but many folks realise that a broader base is needed to create jobs and cultural activity year round so more people can flourish. Some people want both reasonable returns on their investments and to bring benefits to local people, welsh, english, and other nationalities that have settled here. It’s not a either/or but a… Read more »

Jonathon Gammond
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Jonathon Gammond

There must be some way to differentiate between those offering self-catering as a locally run business, for instance a farmer converting a redundant farm building into holiday accomodation as part of a business diversification scheme, and those who are in effect letting out the property to subsidize their purchase of a holiday home for their own personal use and then claiming small business tax relief to minimize their costs. It should be possible to decide what is a ‘business’ and what is not. All homeowners should be contributing through council tax in order that local services are properly funded; we… Read more »

Mawkernewek
Guest

I would suggest that a business that is primarily renting out property is something distinct from a productive business that is directly generating economic activity and employment. Perhaps letting out property shouldn’t qualify for small business rates relief. The landlord in many cases won’t live locally, and holiday lets in coastal villages could even be financialised and re-marketed to investors in all sorts of exotic ways. The limited amount of low paid employment that is provided by a self-catering holiday let that may be let out for only part of the year, and potentially less than what it ought to… Read more »

John Rees Moss
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John Rees Moss

It is disappointing to read that Plaid Cymru AM Sian Gwenllian believe owners of properties in North Wales, which councils have categorised as second homes, are exploiting a legal loophole by declaring their establishments to be businesses. I suggest that she reads the UK Government Website on this matter, which states: “if your property is in Wales it will be rated as a self-catering property and valued for business rates if it’s both:  available to let for short periods that total 140 days or more per year; and actually let for 70 days.” It is therefore disingenuous of her to suggest… Read more »