HMOs And Council Tax Banding!

There is much to consider when investing in an HMO and we spend a lot of time advising landlords on the best way to source, finance and manage their investments, as well as providing guidance on areas such as compliance, which are crucial to get right.

One area which is sometimes overlooked by investors is Council Tax. It is significant that Medway homeowners have seen an increase of 3.49% this year, which is a 287% increase on the current CPIH rate of 0.9% for the 12 months to January 2021.

How Is Council Tax Different with an HMO?

Unlike a standard single-let property, an HMO owner is required to pay the Council Tax when renting an HMO. There are some exceptions to this which we will touch on below.

When you are commencing an HMO conversion project, it is always advisable to contact the relevant Council Tax department as you may be entitled to a short period where no tax is due if the property is vacant.

How is Council Tax for an HMO Banded?

This is quite a complex area and something that can cause issues; careful planning from the outset is crucial to getting things right. Whilst we hope that you find the advice below helpful it certainly should be verified by a specialist if you are commencing on an HMO project.

The website states that, with an HMO, each separately let part of a property qualifies as a separate dwelling with its own band. However, there are also some circumstances when the Valuation Office Agency (VOA) can combine the bands.

Council Tax on an HMO is calculated by the local authority on a case-by-case basis. Below are some examples that should help illustrate how it is calculated:

  • Where there are little or no adaptions: This would include things such as simply locks on bedroom doors and tenants share the communal parts of the house. In this instance, the VOA tends to apply one band to the whole property.
  • Adaptions to individual rooms: Where separately let rooms within an HMO may have been adapted to include things such as an en-suite or kitchenette, each room will be given its own band (even if some facilities are shared). There is no standard approach that the VOA take when making this assessment and this can pose a significant challenge to landlords as it seems to be simply ‘luck of the draw’ as to which way the assessment goes!
  • Purpose-built HMOs: Where an HMO is purpose-built, it would generally not be combined, and an assessment would be carried out for each individual internal unit.

There is also some extremely helpful information on the website.

It’s not Always the Landlord who Pays!

We mentioned above that the property owner must pay the Council Tax, however, it is not always the landlord who is liable for the bill: there are situations where the tenants are liable to pay. Examples of this could be:

Sharers with tenants in common: Where a property is deemed an HMO but does not require a license, it may be let on a ‘sharers’ basis where the tenants may, for example, be friends renting together.

As they are tenants in common, occupy the whole property and allocate rooms between themselves as opposed to on the tenancy agreement, the property is not deemed an HMO for council tax purposes. With the rising cost of renting, this is a growing trend. However, landlords must ensure they do not fall foul of licensing requirements. If, on this basis, sharers are named on the whole property agreement as tenants in common, then they will be liable for the Council Tax.

As mentioned above, it does appear to be random as to whether you will be banded as individual rooms or a whole property and this is, in my view, entirely unfair for landlords and decisions believed to be wrong can and should be appealed.

Risks of getting it wrong

The particular risk here is that you could end up with an individual bill for each room. Although the tenants would technically become liable to pay the council tax if the property was single-banded, in reality, the cost may be difficult to pass onto the tenant without them looking for alternative accommodation. This means that your council tax bill would be significantly inflated in this case. This could lead to you needing to either increase rents to cover the shortfall.

It is compliance risks such as this where you need to ensure you have specialist advice: if you take the wrong approach, you could find yourself experiencing problems. There are a few things you can do to help avoid this situation, although, not necessarily mitigate it completely.

Firstly, ensure you have the correct wording on your tenancy agreements. We cannot over-emphasise the importance of a properly worded agreement! Whilst we are not able to give legal advice, our contracts include the following clause: “To pay the charges for Council Tax (or similar charge which replaces it) and Utilities and other relevant suppliers that you are responsible for as specified in this agreement.”

Getting aspects such as your tenancy agreement spot-on does require specialist legal input and we would recommend that you always seek advice before implementing.

We trust that you found this article helpful! We run tailored discovery sessions to provide property investors with all the tools they require to either make their first investment, move into a new area, review, or expand their portfolio.

Sessions last two hours, cost £147 and have proved extremely helpful to both novice and experienced investors alike. We also hand out a copy of our book the HMO Crash Guide (currently at 13,000 words). We've conducted around a dozen of these since launching this service around this time last year. You can find out more and book a session here.

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