What HMO Landlords Need to Know About Council Tax

Introduction

The government rolled out the new legislation affecting HMO landlords in November 2023, officially putting it into action on December 1, 2023. With a tight timeline, landlords, tenants, and councils have had a limited opportunity to grasp the implications of these rules.

The media, interpreting the regulation, suggests a shift in responsibility—indicating that all HMO landlords, and not tenants, will now bear the Council Tax burden. However, the reality is not as straightforward. Let’s delve into perplexing terminology and issues to shed light on how these changes may specifically impact HMO landlords!

Index of Content

Introduction
Key Changes to HMO Council Tax Regulations: Disaggregation and Responsibility Amendments (November 2023)
iHowz Holds a Members Workshop on HMOs and Council Tax
David d’Orton Gibson takes us through the Legislation
The Local Government Finance Act 1992: The Introduction of Council Tax
The Council Tax Liability for Owners Regulations 1992, 1993, and 1995 Amendments
Back to the Council Tax (Liability for Owners) (Amendment) Regulations 1993
The Importance of the Definition of ‘Owner’ in Section 2A
Decoding the Confusion: Unravelling the 2023 HMO Legislation Changes and Their Impact on Landlords and Local Council Authorities
Summary
Navigating Council Tax Responsibilities: iHowz Perspective Contrasts Government Notifications
HMO Advocacy: iHowz Campaign for Clarity and Collaboration in Light of 2023 Changes

Key Changes to HMO Council Tax Regulations: Disaggregation and Responsibility Amendments (November 2023)

The Government introduced the new legislation titled ‘The Council Tax (Chargeable Dwellings and Liability for Owners) (Amendment) (England) Regulations 2023‘. This legislation brings about significant changes in the way Council Tax is charged for House in Multiple Occupation (HMOs).

This new legislation encompasses two vital aspects related to HMOs:-

1. Disaggregation: The legislation ceased the practice of disaggregating (splitting up) HMOs to charge Council Tax for individual rooms. Councils that had previously split up HMOs were ordered to re-aggregate, making the entire unit of accommodation liable for Council Tax. However, complications will arise when the unit contains a mix of self-contained and room lets.
2. Council Tax Responsibility: The new legislation intends to band all HMOs as a single dwelling, making owners responsible for Council Tax. However, the definition of “owner” includes individuals with a material interest in the dwelling, and this includes tenants with tenancy agreements lasting at least six months. Therefore, where an HMO is let on a room-by-room basis, the landlord is responsible, but where it is let to any number of people on one agreement, the tenants are liable.

iHowz Holds a Members Workshop on HMOs and Council Tax

Because there is so much confusion and misinterpretation surrounding the new regulations, iHowz invited David d’Orton Gibson from Training for Professionals to explain the intricacies of the changes. Training for Professionals is the largest provider of lettings legislation training across England and Wales. David d’Orton Gibson worked his magic in taking us through previous legislation to correctly interpret the latest amendments to the act. Keep reading for further details, or dive into the video explanation below:-

 

Let’s take a quick look at the Council Tax (Chargeable Dwellings and Liability for Owners) (Amendment) (England) Regulations 2023:-

David d’Orton Gibson empathises with the widespread confusion caused by the recent amendments. Examining a snippet from the Council Tax (Chargeable Dwellings and Liability for Owners) (Amendment) (England) Regulations 2023, Section 3 (c) appears straightforward—it holds the owner responsible if the property is an HMO. However, unravelling the complexities reveals a more nuanced reality.

David d’Orton Gibson takes us through the Legislation

Before his enlightening insights into the legal documentation, David d’Orton Gibson stated,

There is a principle in reading legislation that you can never read one piece of legislation on its own

So, to grasp the intricacies of the recent government amendments, let’s embark on a journey down legislative memory lane. This exploration will provide a comprehensive understanding of the evolving landscape.

 

The Local Government Finance Act 1992: The Introduction of Council Tax

The Local Government Finance Act of 1992 in the United Kingdom marked a significant change in the system of local taxation, introducing the Council Tax to replace the Community Charge, commonly known as the ‘poll tax’. However, for our purposes, we are going to take a look at Section 6 of this act.

In essence, the highlighted section operates as a hierarchy. The council tax obligation starts with the first eligible person on the list. If none of the listed individuals exist, the responsibility for Council Tax payment ultimately falls to the dwelling’s owner, as stipulated in the final provision (f).

Yet, according to David d’Orton Gibson, this clause is deceptive. The reason for this is that in Section 5(a) (below) the definition of ‘owner’ is not what most people understand it to be. Surprisingly, the definition does not refer to the actual owner!

According to the above definition, holding a six-month fixed-term assured tenancy qualifies you as the ‘owner.’ The intricacies of language and definitions become paramount as the concept of ‘owner’ does not, in every case, actually mean the HMO landlord.

Furthermore, within the same act, there is a list of ‘prescribed circumstances.’ This means that the individual responsible for paying council tax is determined by default unless a specific situation is prescribed. This provision empowers the secretary of state to establish rules, specifying the party obligated to pay council tax in specific circumstances.

The Council Tax Liability for Owners Regulations 1992, 1993, and 1995 Amendments

In the Council Tax Liability for Owners Regulations of 1992, ‘Class C’ defined Houses in Multiple Occupation (HMO). However, we won’t delve into this definition, as it had a fleeting existence. By 1993, the government had opted for an updated definition of HMO which you can see below:-

In The Council Tax (Liability for Owners) (Amendment) Regulations 1993. The crucial element of the definition lies in the seemingly inconspicuous word ‘and.’ Initially, the criteria included (a) ‘a property that was originally constructed or subsequently adapted for occupation’ and (b) ‘inhabited by two or more persons who do not form a single household.’ To qualify as an HMO, both criteria had to be satisfied.

The Council Tax (Liability for Owners and Additional Provisions for Discount Disregards) (Amendment) Regulations 1995 mandated a significant alteration: substituting the word ‘and‘ with ‘or‘.

Back to the Council Tax (Liability for Owners) (Amendment) Regulations 1993

So, under the amended regulations in The Council Tax (Liability for Owners and Additional Provisions for Discount Disregards) (Amendment) Regulations 1995, a notable shift occurred. Now, if you owned a house that fell under Section a (above), i.e.  “originally constructed or subsequently adapted for occupation by people who do not constitute a single household”, the responsibility for council tax payments falls on the landlord. OR (section b above), if the property is inhabited by two or more persons renting only part of the dwelling, such as in a bedsit scenario, the landlord remains liable.

The Importance of the Definition of ‘Owner’ in Section 2A

This is where the significance of Section 2A (above) of the 1993 regulations comes into play. Notably, the term ‘owner’ undergoes a redefinition. Under prescribed circumstances, it is typically the owner who bears the responsibility for council tax payments.

Section 2A (a) of the act specifies that the owner is “the person who has a relevant material interest which is not subject to a relevant material interest inferior to it;” For instance, if you are the leaseholder, you possess a relevant material interest. However, if you sublet the entire property to someone else, there exists another party with an inferior relevant material interest.

Under Section 2A, the definition of relevant material interest encompasses a freehold or leasehold interest in the ‘whole of the dwelling.’ Consequently, if you are leasing the entire dwelling, you become the person responsible for paying the council tax. However, in a scenario where a property is leased to five students under a single contract, they become the individuals with the ‘inferior material interest’ in the chain and they are liable to pay the council tax. This holds even if the property has undergone modifications like adding locks to the bedrooms, provided you are letting it under a single contract.

Decoding the Confusion: Unravelling the 2023 HMO Legislation Changes and Their Impact on Landlords and Local Council Authorities

So, bringing us up to date with the 2023 legislation, two notable changes are confusing, particularly for HMO landlords. David d’Orton Gibson believes that these changes will also lead to widespread confusion for Local Council Authorities.

Section 254, (underlined above) pertains to the classic shared house or bedsit-type HMO. Notably, it excludes Section 257, which applies to converted blocks of flats where only a third of them are let out.

Another small change (also underlined) is that Sections 1(e) and 5 were omitted. Section 5 relates to the Housing Act 2004 Schedule 14. Housing Act 2004 Schedule 14 lists various exclusions to being an HMO. Of particular interest is Paragraph 7 which states that “any building occupied only by two persons who form two households’ is not considered an HMO.” However, the council tax definition has excluded this exemption, potentially causing some cases to fall outside the HMO definition but within the council tax element of it.

Another important addition is Paragraph C, which states, ‘”The property is an HMO”. This statement contributes to the confusion around owner liability. However, understanding the 2A definition of ‘owner is crucial, because as we have seen, it changes what is meant by the term ‘owner’.

So, for those with bedsits, disaggregation no longer permits charging Band A for each HMO; it necessitates treating the property as one building in the higher Band G. If you’re renting bedsits, where each room has individual tenancies, you, as the owner, remain liable. However, if the same house is rented to the same five people under one contract the tenants are liable.

Summary

The confusion regarding the unintended consequences of Council Tax Responsibility finds its roots in the legislative hierarchy, notably within the Local Government Finance Act 1992 and the Council Tax (Liability for Owners) (Amendment) Regulations 1993. Below is a summary by Peter Littlewood of iHowz:-

• In the legislation, it explicitly designates the owner as liable if the property is an HMO.
• The Local Government Finance Act 1992, Section 6, establishes the hierarchy of liability, emphasizing the owner’s ultimate responsibility.
• However, Clause 5 introduces a twist, defining the owner as anyone with ‘a material interest in the whole or any part of the dwelling.’ This extends to anyone with a tenancy agreement, granted for at least six months.
• The Council Tax (Liability for Owners) (Amendment) Regulations 1993, Section 2, outlines the HMO definition, encompassing dwellings constructed or adapted for non-single household occupancy.
• Section 2a introduces ‘relevant material interest,’ denoting a freehold or leasehold interest in the entire dwelling. This means that under certain circumstances, where any number of tenants share one agreement, they become liable for Council Tax, aligning with point 3.
• Notably, Schedule 14 of the Housing Act 2004 specifies HMO exclusions. However, the new Act disregards these exclusions, creating confusion. For instance, the requirement for an HMO to have more than two people (Schedule 14(7)) is overridden. Consequently, any number of people under one agreement are now liable for Council Tax.

This intricate web of definitions and amendments adds to the expected confusion. Traditional notions of ownership and HMO characteristics may clash with the new regulations. This can lead to varied interpretations and potential challenges in implementation.

Navigating Council Tax Responsibilities: iHowz Perspective Contrasts Government Notifications

The Government has issued notifications to all councils about the recent changes (you can view the letter here). The letter asserts that ‘council tax liability rests with the landlords of HMOs covered by the regulations‘. However, our stance differs. We disagree with this interpretation. iHowz will be reaching out to all councils in the Southeast, including London, to clarify why we believe the situation remains unchanged. Our guidance will emphasize:

• If a property is leased under one agreement for the entire unit, irrespective of the number of tenants, the responsibility for paying Council Tax falls on the tenants. This applies to leases of 6 months or more, including the Fixed Term followed by the Contractual Periodic.
• In the case of room-by-room rentals, it is the landlord who assumes responsibility for Council Tax payments. Importantly, the landlord should technically incorporate the Council Tax into the rent. This aligns with legislation that permits Council Tax payment directly to the Local Authority

HMO Advocacy: iHowz Campaign for Clarity and Collaboration in Light of 2023 Changes

iHowz is dedicated to leading a campaign to enlighten its members, HMO landlords, tenants, and councils about the implications of the 2023 changes. We believe in fostering understanding and collaboration to navigate these complexities effectively.

– Landlords, to stay informed and engaged, consider becoming a member of iHowz, where you’ll gain exclusive insights and support.

– We encourage you to voice your concerns by writing to your local County Councils and MPs to ensure your perspective is heard

– Feel free to reach out to us at info@ihowz.uk. If you’ve received a Council Tax bill and find your situation doesn’t align with the criteria mentioned above. We’re here to help!

– Connect with us or follow us on social media to stay updated on the latest developments and join the conversation. (Scroll to the very bottom of this post and follow us on Facebook, LinkedIn, X, and YouTube).

Together, we can navigate these changes and contribute to a clearer, more transparent future for HMO regulations.

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