Council Tax Liability in Houses of Multiple Occupancy (HMO)

HMOs are confusing enough, so when you add tax laws and mix them up with housing laws, it can all get quite messy. We'll try to unpack the detail here very briefly, but in summary, the following are the areas for consideration:

• Who is responsible for paying the Council Tax
• How the house is Council Tax banded by the VOA
• How much the Council Tax is and the effect on Rental Returns
• Rate of Council Tax differs by Local Authority - significantly

Who is responsible for the Council Tax?

Generally, in letting out a house or 'dwelling', the Tenant is responsible. However, when it comes to HMOs things get a bit more complex. The legislation that defines this is Regulation 2 Council Tax (Liability for Owners) Regulations 1992 and in short it says:

1. If you let your HMO by the room (bedsits) then the LANDLORD is responsible; OR
2. If you use Licence Agreements (which are used rarely and only for certain circumstances) then the LANDLORD is responsible.
3. If your HMO is let out on a Joint and Several contract to a group of tenants who share the whole house together, then the TENANT is responsible.
4. If you let your HMO out by the room, and each room has its own Council Tax banding, then each room is a dwelling and the TENANT will be responsible.

Nb. If you do let out your house, it's worthwhile having a clause in your Tenancy Agreement to say who is responsible for the Council Tax.

How the house is Council Tax banded by the VOA

Post December 2023

It's a relief to report that the perverse treatment of banding HMO rooms as Band A dwellings, detailed below, has been addressed in Statute Law, so from 1 December 2023 all HMOs have to be banded by the VOA as a single dwellinghouse and not by the room. Who is liable remains down to how the HMO is contracted, i.e. If let by the room then a Landlord will be liable and if let to a Group of tenants on a Joint and Several basis, then the Tenant is Liable.

External details of this change to Council Tax Aggregation or HMOs is here: https://www.gov.uk/guidance/ho...

Pre December 2023

In the following circumstances it is likely that the Valuation Office Agency (VOA) will determine the Council Tax based on the whole house as a Dwellinghouse, this is known as an 'aggregated valuation':

• HMO let out to groups on a single joint Tenancy Agreement
• HMO let out by the room, where the room contains no amenities
• HMO let out by the room, where the room contains some amenities but where significant other shared space exists

The VOA are able to band individual bedsits as their own distinct dwellinghouses, meaning that Council Tax can be levied on a room - this is useful for a Local Authority as instead of getting 1x Band D council tax they could get 5x Band A, In Nottingham City that works out to be £4,427 up from £1,771 - you can see why a Council may like to have HMOs banded by the room. In these instances, each room would have a Band A Council Tax Valuation and each occupant, if living alone in the room, would receive a 25% discount, but would need to pay the Council Tax themselves, as tenant.

• HMO let out by the room, where significant adaption to the house has taken place and facilities for day to day living are provided

This is a really helpful link to explain when HMO will have an aggregate valuation (whole house) or by the room: Link to diagrams and explanation by VOA.

How much the Council Tax is and effect on Rental Returns

You may be thinking, that having a HMO where the tenants must pay the Council Tax will be a win for the landlord, as it would reduce the landlord's costs. However, where a HMO is subject to a room Band A valuation, this will have downward pressure on the achievable rent, as compared to your competitor, the Council Tax payable makes the room more expensive for the tenant. A reduced cost maybe, but also a more difficult to let room due to the higher costs borne by the tenants and if tenants rent the room and later begin to feel the impact of the additional Council Tax costs, they will likely vote with their feet and move on quicker. Tenants moving = higher landlord costs and voids.

All in all, a HMO with VOA Council Tax valuations by the room, will likely result in reduced rental profits for landlords. That said, the adaptions made to a HMO that would make it have Council Tax room bandings (en suite and kitchenettes) will naturally attract a higher rent.

Council Tax rates differ by Local Authority

Lastly, we'd just like to make this point as we find it is often not thought about when comparing property investment opportunities. A HMO in Tooting will pay less Council Tax than a HMO in Nottingham or more northern geographies due to the relative welfare bills in a local authority.

• Band B in Tooting is £562
• Band B in Nottingham £1,440

Therefore, when you evaluate a HMO, and consider that rooms may be Council Tax banded by the room, it really is important to understand the prevailing Council Tax costs. Many investors are enjoying buying Northern property because of the relatively attractive rental yields compared with the South - We don't hear many people considering that the cost base can be more expensive in the North....