Council tax during renovation?

If you are planning to buy a rental home, or you're thinking about what to do with one you have just acquired, this is the place for any questions about starting out in the rentals business.
Running Chrissy
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Council tax during renovation?

Post by Running Chrissy »

Morning LMH, I have a couple of financial head scratchers for you.

We are buying a property which is currently residential but which we will run as a holiday let. It needs a few months of building work. During that time will we have to pay council tax rather than business rates? Or can we declare it as a business somehow? We're not going to go the limited company route.

Also if the property is only ready by say September, will the 210 / 105 days requirement for tax break purposes be halved as we can't do the full tax year? Or will we have to set our own tax year?

Thanks
Chrissy
akwe-xavante
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Post by akwe-xavante »

Two scenarios possibly.

firstly you can apply for a council tax break. A simple phone call to the council. Explain what your doing and that the property is unfit for human habitation and or does not have a bathroom or kitchen and it's unfurnished. Remove / dismantle and store the beds upright in a corner.

They will probably want to visit to check you're basically telling the truth. On doing so they'll decide if you qualify for up to a 3, 6 or 12 month council tax break. You can extend a tax break if work is not completed as expected up to a total of 12 months.

If they don't arrange an appointment with you for someone to call and basically check then do expect someone to just turn up without an appointment (Spot Check).

If you get an appointment then make sure the place is mucky, busy and un-inhabitable on the day, no beds and or no usable toilet or kitchen.

Not sure but I don't think you can change from residential council tax to Business rates until you start trading (For a FHL it needs to be ready to take guests and advertised as such in some way even if it's essentially empty and you have no bookings).

secondly if you find that you end up paying the council tax at some point you may then be able to claim it back later when you switch from council tax to business rates. You can back date transfer from council to business rates for up to 12 months.

Your first tax year doesn't have to be 12 months. Starting a business say on the 1st Sept 2017 you can end your first period of taxation on the 5th April 2018 or the 5th April 2019. Or in fact any date of your choice but the 5th April is the norm and the least complex.

Your first year will be either be a 7month year or a 19 month year and then yearly after that. You must tell the tax man though. I wouldn't put yourself in a situation whereby you end up having a tax year that starts / ends for example on the 1st September every year, complicated but your accountant will love you for it because of the additional work you'll have to pay for.

If you go for a short first year you'll make a loss, if you go for long first year depending on how much you've spent you might break even or make a small un-taxable profit.

I would have a 19 month first year.
Running Chrissy
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Post by Running Chrissy »

Thank you, that is great info and makes perfect sense. I think it will be two or three years before we see a profit but we will carry the losses forward.
akwe-xavante
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Post by akwe-xavante »

Try not to think of the cost of building works as losses but rather a long term investment in the property that you'll eventually get back when you sell the property in future.

Example: You spend £100K to buy and spend £25K on building work and improvements or modernising. On doing so your property could then be worth £150K and will increase in value over the years.

Even if you don't let your property out through a letting agent in the end or you may already have plans to do this yourself anyway already it would be worth your while getting two or three sales reps round to have a look at it and offer advice before you start works. These people know what best works when letting a property out as a holiday let.

It may influence what you're planning to do. They could save you a lot of money and time.
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Nemo
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Post by Nemo »

Check the council you're under. Some areas have done away with any form of discount on Council Tax for second homes, whether habitable or not, or reduced it to something very small.
akwe-xavante
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Post by akwe-xavante »

If nobody is living in it even if it's a second home and it's uninhabitable, unfurnished and the toilet doesn't flush or the kitchen sink is disconnected or isolated you will qualify for a tax exemption rather than a tax discount. Actually temporarily disconnect the toilet and or the kitchen sink from the water supply.

If beds are present, dismantle them and store them upright against the wall or remove them altogether if that's possible.

By doing so you qualify for council tax exemptions not discounts.

Habitable: Flushable loo and running water at the kitchen sink. You'll pay council tax. May qualify for minor discounts.

Uninhabitable: No flushable loo and or no running water at the kitchen sink and no usable beds. Will qualify for tax Exemption regardless of whether it's a second home.

Derelict: Severe structural damage (Subsidence, settlement) and or no windows or damaged roof or no roof. Can be permanently removed from the council's taxation system altogether.
Last edited by akwe-xavante on Tue Mar 21, 2017 2:33 pm, edited 1 time in total.
newtimber
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Post by newtimber »

You may have to be careful not to lose capital allowances. Electrics plumbing and heating and other integral features qualify for capital allowances if running an FHL but not if you aren't.
By applying for council tax, it might be argued that you were intending to live there, did the work, and then started running your FHL in which case the work was done prior to your starting your business and therefore not eligible for the allowances.

I'm not an accountant, but it might be worthwhile seeking professional advice.
akwe-xavante
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Post by akwe-xavante »

When you purchase a residential property you automatically have to pay full council tax whether you like it or not regardless of your intensions for the property. You may qualify for discounts or exemptions on application.

When you purchase a commercial property you automatically have to pay full business rates whether you like it or not regardless of your intensions for the property. You may qualify for discounts or exemptions on application.

I think it's kinda the other way around: If you buy with the intensions of keeping the property long term and or use it as a FHL use up any taxable allowances then sell early for whatever reason then your equity (If there is any) is could be taxed differently and you could loose any allowances. The taxman may decide that you bought and sold as a developer/investor instead which are subjected to different taxation rules.

Get a friend or family member to email you to congratulate you on your recent purchase (The Property). Get this person to then ask you what your plans are. Reply. Keep and print out these emails just in case. You have written proof of your initial intensions for the property should you change your mind or have to sell early for whatever reason.

However I agree, seek professional advice. Try http://www.taxcafe.co.uk/ excellent advice and the Property tax guide is worth 100000X it's weight in Gold. Buy the current edition and get the next one free. There not about avoiding tax but rather about controlling and reducing your tax liabilities to a minimum long term.

Love them
Running Chrissy
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Post by Running Chrissy »

New timber yes that's a v good point about integral features. You are right, we should check with a professional.
We are 100% going to be running this as a business so definitely do not want anyone official thinking we have it as a second home.

Akwe - thank you for the link, sounds v good. When I mentioned about losses, I just meant carrying them forward for tax purposes so that even when we start making a profit we won't have to pay as much tax.
I totally take your point about this being a long game. We hope that it will be a good investment but most importantly a retirement income. We're both in our mid-forties so by the time we retire we won't have long to go on the mortgage.

Nemo it's Cornwall so probably no Council Tax discount. Would be best to come under business rates if possible because they should be 100% rebated.
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Nemo
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Post by Nemo »

akwe-xavante wrote:If nobody is living in it even if it's a second home and it's uninhabitable, unfurnished and the toilet doesn't flush or the kitchen sink is disconnected or isolated you will qualify for a tax exemption rather than a tax discount
Not in the council district my properties are in. All forms of exemption are being abolished for uninhabitable properties from April 1st this year, unless unoccupied by default of someone going into prison, hospital, dying etc. Clearly trying to ensure that as many properties remain habitable as possible and not rewarding those that leave them empty. I know of one developer that has left properties empty for years, simply allowing them to gain value by the growth of the housing market. Now he will have to pay for the privilege of doing that.

I'd suggest the best route is to speak to the Business Rates department of your council. I found them far more knowledgeable than the Council Tax department. If your intention is to let it out as soon as it's habitable then you may well be able to go immediately on to rates rather than Council Tax. I never paid C Tax on either of my newly refurbished properties, but instead had a long wait, especially with one, until the Valuation Office got round to adding it into their system. A very overworked office, hence the time delay, but I got there eventually and "paid" rates from day one. I say "paid" as it qualified for small business rates relief, which you have to apply for, it doesn't happen automatically, and therefore has had "nil charge" whilst SBBR still exists. I do pay rates on property number two, but as we've discovered from discussions on here that can be different across Wales, Scotland etc. However as you're in England then it's reasonably straight forward with just one property to worry about.
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greenbarn
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Post by greenbarn »

Some councils are taking it a stage further. As an example, in Richmondshire DC where empty properties used to qualify for a discount, they now attract a 50% premium:
EMPTY HOMES PREMIUM
Certain Council Tax discounts have been awarded at the discretion of local authorities, in England, since 1 April 2013.
The 'empty homes premium', allowing up to 150% Council Tax on long-term empty properties, was introduced at the same time.

From 1 April 2016, Richmondshire District Council decided to levy an ‘empty homes premium’ for long-term empty properties. As such, properties which have been unoccupied and substantially unfurnished for over two years will be charged 150% of the normal liability.
Which is a bit of a bugger when you’ve been trying to sell the place for 2 years. :evil:
Zingara
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Post by Zingara »

Shepway Council do the same, even if you've been trying to 'save' a property from the ravages of the sea air. Valuation office can only take the property off the the CT list if structural problem such as subsidence.....
akwe-xavante
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Post by akwe-xavante »

Forgive me if I'm wrong here but.

I think some people are confusing or believing that a Council Tax Exemption and a Discount are one and the same thing!?

There not, an exemption is a very different thing to a discount.

Discounts are a local government thing and differ from county to county and England, Wales, Scotland and Northern Ireland.

Exemptions are a national thing, granted by Westminster not your local council and apply to the whole UK regardless of county or UK country.

Phone the council and ask for an exemption. One of two things will happen, they'll say no and you'll have to pay council tax anyway or they'll say yes and grant an exemption. You'll have to pay council tax from day one whether you like it or not. If they say no then try switching to business rates but me thinks you'll fail until the property is actually being marketed as a FHL and ready to take guests. I may be wrong though.

Ask for an exemption though, don't ask for a discount.

So ok it is your local council that oversee the granting of exemptions on council tax but they do so by law outlined by government at national level.

Council Tax discounts are very different.

An exemption is not a discount.

To qualify for an exemption (NOT A DISCOUNT) a property needs to be uninhabitable. Uninhabitable in this context means no flushing loo and or no running water at the kitchen sink. Unfurnished but the key item(s) are the beds, remove them or stand mattresses up in a corner and dismantle the bed frames.

An empty property that has a flushing loo, running water at the kitchen sink and or beds does not qualify for an exemption no matter what condition it is in. But it may at the discretion of your local council qualify for either a discount or an added empty home premium.

A property can be knee deep in dog muck infested with cockroaches with broken windows but if it has a flushable loo, running water at the kitchen sink its habitable!

A property can be the opposite extreme, £100K of gold leaf, the best most expensive marble, basically a house to die for but if it doesn't have a flushable loo, running water at the kitchen sink and no beds it qualifies for a council tax exemption for up to a maximum of 12 months. After which you pay council tax and at the discretion of your local council may qualify for either a discount or an added empty home premium.


Empty Homes Premiums are different again, remove the loo and kitchen sink and you'll qualify for an exemption up to a maximum of 12 months. But if you're selling a place you don't want to do this obviously that then means that the property is habitable and therefore you must pay council tax even if its empty and unfurnished. For properties that have been empty for more than 24 months a council has a right to impose an additional premium if it wants too. obviously they will.

I know changes are being debated but as yet have not being introduced as regards to Exemptions but local councils now do have the powers to grant prolonged discounts or add increased premiums on properties.

I have two properties at the moment undergoing works, one in North Yorkshire and one in Cumbria, I have council tax exemptions on both whilst works is being undertaken one of which is for 12 months because it doesn't have a bathroom at all at the mo (I ripped it out on day one) and there's so much other more important stuff to do before I fit a new bathroom. When the 12 month exemption comes to an end i'll have to start paying council tax even if works hasn't been completed. My other property has a 6 month exemption which I could try extending for a further 6 months if required at the time.
Zingara
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Post by Zingara »

Not confused here, but hope I haven't confused anyone else.

I have just been declined an exemption by the local valuations office (South), as they regard the problems with the buildingas due to maintenance, not structural (ie. subsidence).

So, although the property is uninhabitable (no bathroom/ boiler/ kitchen/running water) we will continue to pay 150% Council tax, with no discount available, either.

Interpretation of the rules seem different in different areas?
akwe-xavante
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Post by akwe-xavante »

I would challenge that as it's wrong. Try talking to your local MP or contact the tax office or somebody.

I think they are hoping you accept the decision and roll over and move on without a fuss.

Don't know who you should contact about this as I have never been refused an exemption.

I think they are trying it on.

Just had a thought......has the property already exhausted a 12 month exemption already by the previous owner in recent years but nothing was done to improve the property at the time? Just kinda thinking outloud. Ask the council if this is the case in your situation. An exemption applies to the property not to the owner. I would still explore a way and means of overturning your councils decision though.

Thinking about your problem without any knowledge try exploring a reverse workround. If the property is band A then its probably not worth the effort but if its in a much higher tax band then It may be a worthwhile exercise. What is meant by occupied? Explore the rules and work out if you can fulfil the rules even if It means sleeping over a small number of evenings a week or month (part week at home, part week in the property your working on) to avoid paying the extra council tax for an unoccupied property.

Just a Thought. I'll often sleep over to reduce travel time and expenses and maximise working time.
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