HMO council tax: New valuation bins council tax per bedroom rule

Have you been holding back from enhancing your HMO to avoid having your property ‘split’ for council tax purposes? Or has your HMO already been assigned separate council tax bills? Whichever the case, the new council tax regulations may be a game changer for your investment. The evolving landscape of UK property management, especially for Houses of Multiple Occupation (HMOs), warrants a closer examination of the implications and potential opportunities brought about by the new council tax regulations.

Often, HMO investors faced challenges with council tax disaggregation, treating each living unit within an HMO as a separate dwelling. However, from December 2023, HMOs are officially considered single dwellings for council tax in England, transferring the liability to landlords while putting an end to council tax disaggregation.

While streamlining the process with a single council tax bill transferred to landlords, this alteration places new responsibilities and requires understanding and adapting strategies accordingly. As landlords become liable for council tax, a strategic pricing approach and exploration of discounts or exemptions are once again vital for managing your HMO.

Council Tax Valuation

Council Tax is a levy imposed on residential properties across the UK, serving as a crucial funding source of for local authorities to provide essential community services.

The Valuation Office Agency (VOA) assesses all properties for council tax based on their valuation bands. These bands are determined by the property’s sale value on 1^st April 1991 (that’s the case even if your property was built after this date). There are eight bands, labelled from A to H, used to categorise properties based on their valuation, ranging from the lowest (Band A) to the highest bracket (Band H).

The exact amount of council tax payable depends on the band your property falls into, as well as the rates set by the local council. Properties in higher bands typically pay more council tax than those in lower bands.

Former Rules for HMOs Council Tax

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 have likely classified them as separate dwellings as they are “self-contained dwellings”.

The ‘splitting’ of HMOs into single units (often self-contained flats) has been an issue that HMO investors had to battle against. Council tax disaggregation, the process through which the VOA could divide an HMO into individual units for council tax assessment, meant that your local authority would give each unit its own council tax band and calculate separate council tax bills for each.

It would then be up to the council to apply relevant discounts or exemptions to each bill. However, it wasn’t uncommon for the VOA to disaggregate HMO properties even when tenants shared communal areas like kitchens or bathrooms.

This process added administrative and financial burden to landlords and tenants:

• Competing to rent space against HMOs where tenants don’t have to pay council tax
• Landlords remained liable for council tax during void periods
• Prolonged voids can cost significantly more than the council tax on a non-disaggregated HMO
• Tenants were generally responsible for council tax once the VOA had divided an HMO into multiple units

To ensure you communicate the right information about council tax, ensure you stipulate the information in a comprehensive tenancy agreement. You can find out more about how to do this here. 

HMO Council Tax Changes

As of 1st December 2023, all HMOs (those under Section 254) in England are now formally categorised as single dwellings for council tax purposes and are required to have a single council tax bill. Consequently, the associated council tax liability has now been transferred to landlords.

Under the new regulations for HMOs, landlords are liable for council tax when the property meets specific criteria such as:

• A self-contained building or flat occupied by at least three individuals from multiple households, sharing essential facilities such as toilets, bathrooms, or kitchens.
• A converted building that doesn’t consist entirely of self-contained flats. For instance, a property with a bathroom in a separate hallway rather than within the flat itself.

These changes derive from the HMO council tax valuation consultation finalised on 31^st March 2023 by the Department for Levelling Up, Housing and Communities.

So, who will pay council tax in HMO from now on?

In a nutshell, and in contrast to typical single tenancy properties, HMO landlords are now responsible to pay council tax bills on their HMO. With this revised responsibility, as a landlord, you’ll benefit from considering the impact and the opportunities to adjust your financial and investment HMO strategies. For instance, if you’ve been holding back enhancing your property with the most attractive amenities in the market only to avoid having your HMO ‘split’ for council tax purposes… that’s no longer a concern. Ensuites, anyone?

Exemptions and Discounts for HMO Council Tax

When properties are vacant, landlords must navigate different rules. Before 2013, vacant unfurnished properties enjoyed exemptions during refurbishment or short-term vacancies. Now, local authorities can offer discounts at their discretion, making it essential for landlords to stay informed about local policies.

Properties occupied solely by qualifying students are exempt from council tax. Understanding the criteria for student exemption to leverage this benefit is essential. For instance, this exemption applies as long as the property is occupied only by qualifying students.

While properties may be eligible for discounts or exemptions, landlords must consult their local council for specific rules and eligibility criteria.

Exclusions: Section 257 HMOs

The scope of the consultation does not extend to other types of shared accommodation. Self-contained flats covered by Section 257 of the Housing Act –consequently, subject to HMO licensing– are excluded from the scope of these amendments. The government reasons that such properties should typically have their own council tax band.

• To recap, the standard classification of a Section 257 HMO includes buildings converted into self-contained flats, where the original conversion failed to adhere to the applicable Building Regulations and continues to be non-compliant.
• Also, for a property to fall under this category, less than two-thirds of the flats should be owner-occupied. In some instances, specific councils may enforce an Additional Licensing scheme (s257) for properties where the proportion of owner-occupied flats is less than 50%.

Re-banding disaggregated HMOs

In light of the recent changes, the VOA confirmed plans to proactively re-band currently not aggregated licensed HMOs into a single council tax band. To facilitate this process, the VOA has clarified the information it’ll require from councils; as outlined in Council Tax information letter 3/2023 Annex A, this includes:

• Unique Property Reference Number (UPRN) 
• Address 
• Postcode 
• Number of households (not people) 
• Licensing details (such as statutory or additional license) 
• Named point of contact at local authority and contact details
• Licensee’s name, address and contact details

Takeaway

The recent changes to council tax regulations for Houses in Multiple Occupation (HMOs) in the UK, effective from December 2023, eliminate the previous practice of council tax disaggregation for HMOs –a process whereby each unit was treated separately, resulting in multiple council tax bills. This alteration introduces new responsibilities for landlords, requiring a strategic approach to pricing and exploration of potential. The advice for landlords is to consider and stay informed about local policies, particularly in the context where local authorities may offer discretionary discounts or exemptions.

As an HMO landlord, you can now unlock the potential benefits by setting renewed strategies and focusing on emerging opportunities. You can consider, for example, the potential gain from upgrading the layout and the design quality of your HMO without concerns about the now obsolete disaggregation.

Bringing 16 years of expertise to the table, HMO Architect specialises in delivering impactful architectural projects and managing our HMO property portfolios. Our dedicated team provides nationwide support to investors, helping them achieve their long-term plans in their property investment vision. Contact HMO Architect for your free discovery call.