HMOs and Council Tax Valuations
HMOs and Council Tax Valuations
Lots of landlords we consult with are reporting that their houses in multiple occupation are being increasingly targeted for what is sometimes called “disaggregation”. This is where the rooms are separated into multiple separate individual council tax bands by the Valuation Office Agency (VOA). This is not good news as it raises the costs to the occupants.
Under council tax legislation, the VOA has long held powers to separate or disaggregate properties into multiple separate units for council tax. Where this happens, the property is split into multiple band “A” properties, increasing the total amount of council tax paid on the property by a significant amount.
While this has been possible for decades it has been relatively rare until recently. The VOA is a reactive organisation and typically only acts on reports from a local authority so most properties that could be disaggregated are not.
In fact, previous surveys by the landlord’s association, the NRLA, found that only around 1% of landlords had experienced disaggregation, which was a significantly smaller percentage than the number of HMO properties.
But it is becoming increasingly common for local authorities to contact the VOA in the event of a landlord making a planning or licensing application for their HMO.
And once the VOA does decide to disaggregate a property, landlords are finding it hard to successfully appeal the decision.
Disaggregation can still happen if a room only tenancy exists, even if the property is not fully self-contained.
This problem is largely caused by the fact that the council tax legislation came before most of the other HMO legislation which generally dates from 2004 onwards – which recognised that an HMO is one dwelling shared by multiple households and was written with the view to increase safety requirements or requiring adaptations for use by separate households.
Penalties for non-compliance with HMO legislation are heavy, with landlords facing civil penalties of up to £30,000 per breach of the HMO regulations. And this incentivises landlords to provide room only tenancies so they can easily access the common parts and manage their HMO better.
Should the VOA investigate, the council tax legislation will default to splitting the property into multiple separate units for council tax. Often this can also lead to lower income tenants losing out, as the council tax bill for the room will be their responsibility unless the tenancy has the landlord paying the bills.
This conflict leads to situations where landlords can be both responsible for licensing one HMO but either they or the tenants are responsible for paying four or five separate council tax bills.
The NRLA thinks this current arrangement is not fair to landlords or tenants and has taken the matter up with both the Government and the Law Commission, requesting they look at this issue.
The NRLA recommended that the council tax legislation be amended so that the property would only qualify for disaggregation if the property was made up of multiple, entirely self-contained units.
HMOs and Individual Council Tax Bands – Easy Money for Local Authorities
If you are thinking, this sounds like easy money for local authorities, you would be right.
If you are wondering why more councils did not do this before, you would be right too. After all, they tend to like easy money.
It is, after all, so easy to rinse landlords for more cash for council coffers using this approach.
So, what should landlords do in response?
Well, the obvious way to stop your property being assessed under individual rooms, is to just put the whole property under a single tenancy.
But of course, if you are talking about any HMOs larger than say three of four beds in a non-student town, your problem is that there are just not that many large groups knocking about with four or more individuals in the group who are happy to come together and let under a single AST.
And you cannot just easily join up disparate people such as working professionals, students and folks on benefits and stick them on a single tenancy agreement. Most people would be wary of trusting strangers under the joint and several liability aspects of a single AST. And even if you could get a group together, they may not “get on” and people would soon want out of the tenancy.
So, letting individual rooms under separate agreements is the simpler way to get rooms filled and avoid voids and it allows for people to leave and be replaced fast. It is more flexible for the occupants and reduces voids for the landlord. But the downside is each room/let could get assessed for council tax separately, raising the overall council tax take on the property and ultimately the cost for each occupant.
If local authorities are dumb enough to keep pursuing this, the supply of easy to let rooms in HMOs might well diminish as landlords turn their HMOs back into single lets or into flats, where that is possible.
The whole approach could bite councils back though.
Where a tenant must pay the council tax on his room, he may choose to pay the rent first and default on the council tax. As one HMO landlord said to me, “All you need to do is make it the tenants responsibility to pay the council tax. Then wish good luck to the councils with trying to recover unpaid council tax from room only tenants on Universal Credit”.
Can HMOs Still Work?
Of course, they can.
Not all local authorities are pursuing this line anyway. And there is still money to be made on HMOs but only in the right area and for the right type of property, with the right management.
And the funny thing about HMOs is that they often offer the best returns in areas that you don’t necessarily expect.
Lots of people think HMOs only work in inner city areas, where there is a strong demand for students combined with a lack of purpose-built student accommodation. Or that they only work well in seaside towns that have long since lost their glamour – or “the Sh*tsville on Sea areas” , as I have sometimes heard such towns referred to.
These things may well be true, but the HMO form of letting often yields the best investment returns in very attractive, quite pricey, touristy rural and posh seaside areas, especially areas which have a limit on new building and where young locals are squeezed out by second homeowners. Think North Norfolk, Devon and Pembrokeshire possibly. HMO yields are often way ahead of single let yields in some of these areas.
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