Many HMO landlords believe that, in recent years, more and more properties are being split up (or disaggregated) so that councils can raise more in tax.
When disaggregation occurs, your tenants in a house in multiple occupation pay council tax rather than you as the landlord. While, on the face of it, that sounds advantageous, it’s not.
The current rules on who pays council tax in HMOs
What disaggregation is and how it affects HMO landlords
The proposed amendments that would, if passed, effectively end disaggregation
The current rules on who pays council tax
In a House in Multiple Occupation (HMO), you as the HMO landlord are generally responsible for paying the council tax. While you can offset that by adjusting the rent you charge to tenants, you can’t legally assign the responsibility to pay council tax to them.
There are exceptions to the rule. They depend on how the property was built, how it’s been adapted and the nature of the tenancy agreements you have in place.
Tenants are normally responsible for council tax if:
- The Valuation Office Agency (VOA) has divided an HMO into multiple units
- The house has a joint tenancy
Multiple tenants with their own tenancy agreement
If you let out an HMO to multiple tenants each with their own tenancy agreement, the likelihood is that your property is being shared by more than one household. In these cases, you may be able to transfer some or all of the council tax liability to the tenants as long as it is in the tenancy agreement.
Multiple tenants with only one tenancy agreement
If you let out an HMO to what is a single household with only one tenancy agreement with all the rent due and all of the tenants’ names on it, they are jointly responsible for meeting the council tax bill. Single households, for the purposes of HMO, include couples in same-sex relationships and relatives who live together.
But if your HMO has been adapted or extended to create additional living units, each unit may get its own council tax bill even if it’s occupied by members of the same household. This is, understandably, an area of great concern to HMO landlords particularly if, for example, they had a 6-bed HMO and had to pay council tax on each one.
HMOs with a “bedsit” configuration
If the living units in your HMO have their own entrances, kitchens and bathroom facilities not shared with other tenants, the VOA and council would be very likely to classify them as separate dwellings as they are “self-contained dwellings”
If an HMO room is completely self-contained, it will also qualify as a flat which will create its own problems in relation to the use of the building. If an HMO room is too independent of the rest of the house, it can be qualified as a flat and the whole property could be classified as a “block of flats”.
This is an issue HMO investors often have to battle against. They need to find a hybrid solution where each room is semi-independent or has some amenities like a kitchenette that could be removed to satisfy planning requirements.
A landlord we spoke to recently is in a dispute with the council over a request to charge council tax on each unit with his 18-bedroom HMO. Each room has an en-suite but no kitchenette. The council believes that they should charge council tax on each room because of the presence of the en-suite. Each council has its own view and requirements on issues like these making the need for clearer regulation to handle the grey areas in HMO classification.
In general, the more facilities you add to an HMO bedroom, the greater the risk that:
- Your local authority will charge council tax on each bedroom
- Your property will be classified as a block of flats and not an HMO which leads to planning complications.
What is disaggregation and how does it affect HMO landlords?
The process of splitting an HMO into single units (often self-contained flats) for council tax purposes is called disaggregation. However, it’s not unknown for the VOA to disaggregate HMO properties even if tenants share common areas like kitchens or bathrooms.
When determining council tax liability after disaggregation, your local authority will give each unit its own council tax band and calculate separate council tax bills for each unit. It’s up to the council then to apply relevant discounts or exemptions to each bill.
This is bad for landlords because:
- You’re competing to rent space against houses in multiple occupation where tenants don’t have to pay council tax.
- You’re liable for council tax during void periods too.
Prolonged voids can cost significantly more than the council tax you pay on a non-disaggregated HMO.
The proposed amendments to the council tax regulations
There are three amendments that are being considered. Two form part of the current “Council tax valuation of Houses in Multiple Occupation (HMOs): consultation” and one in an MP’s amendment to the Council Tax (Exempt Dwellings) Order 1992.
Department for Levelling Up, Housing and Communities proposed amendments
The Department for Levelling Up, Housing and Communities (DLUHC) is currently consulting on two proposed changes relating to disaggregation.
The are concerned that the current rules discourage landlords from improving their properties. There also may be evidence that the rules disincentivise new landlords from entering the market and existing landlords from adding to their portfolios.
The two suggestions from the DLUHC are:
- Under this proposal, the VOA would automatically amalgamate council tax bands for HMOs meaning that they were treated as one property for council tax purposes, other than in exceptional circumstances. Exceptional circumstances in this case are bedsit-like configurations within an HMO.
- Section 3(5) of the Local Government Finance Act 1992 states that “anything which would be two or more dwellings shall be treated as one dwelling”. The government would amend the Council Tax (Chargeable Dwellings) Order 1992 to define HMOs as one dwelling subject to one council tax band, other than in exceptional circumstances.
Even though they take different routes to get there, they sound like they’d deliver the same result. As you can see, however, the proposed DLUHC changes veer towards continuing disaggregation for properties that have distinct and self-contained units within them. To be clear, under both roles, each unit with an HMO would be a chargeable entity for council tax if it has its own entrance, kitchen, and bathroom facilities. In your tenancy agreements, you’d have to include a provision detailing how each tenant will pay council tax.
With both alternatives, it seems that the government wants HMO landlords to improve their properties but, if you create separate units, you’ll have to pay for it. In other words, this imposes a legal requirement on the Valuation Office Agency to disaggregate whereas, at the moment, it’s within the gift of the inspector.
There is another factor to consider also – HMO licence fee. If your local authority requires you to obtain a licence and you pay fees on how many units you have in each property, this could affect what you pay in the future.
The Dinage amendment
The Dinenage amendment is a proposed amendment to the Council Tax (Exempt Dwellings) Order 1992.
The amendment seeks to ban any rooms or bedrooms within a licensed House of Multiple Occupancy (HMO) from being eligible for separate council tax. As with the DLUHC amendments, the intention is to stop the imposition of council tax on tenants of a room in a house with shared facilities, or in a licensed HMO.
There is again however a lack of clarity on bedsit-like configurations in HMOs.
If one of these amendments becomes law, it will have an impact on HMO landlords. It’s encouraging that the government has recognised the difficulties caused by aggregation but we’re not sure the amendments they have proposed offer the certainty or clarity needed.
The consultation is still open – please click here to share your views.
To speak to an HMO architect about your current or future properties, please get in touch.