Wendy Whittaker-Large
You’ve just invested a large amount of capital buying a disused office building that you’re planning on turning into a fantastic 8 bed HMO. You’ve done your due diligence on the area, you can confidently predict the income on each en-suite room. There’s no article 4 in the locality that could cause a delay to the development due to planning permission. The layout of the building is ideal for conversion, and under permitted development you can relatively straightforwardly convert the building to an HMO.
Your builder starts and finishes almost on time; the spend on the refurb is within tolerance, and after a few months, ta-da! Your beautiful HMO is ready to let out. Your HMO licence comes through quickly and it’s nice to hear the comments from the licencing officer who notices the well-designed layout and thoughtfulness you’ve put into the communal areas and living spaces.
Within a few days, the advert on Spareroom is getting a lot of attention. Even your initial viewings lead to success, with 7 of the 8 rooms being reserved immediately. Amazing!
The new tenants move in and the last room is filled. The rent starts to flow into your account and you can see why HMOs make such a good investment and why so many people are enthusiastic about them as a form of income. A few weeks later, you start the process of remortgaging. Your mortgage broker is positive about the potential valuation (booked for later that month) and you start to see that you might even be able to draw out all your money. This could be a case study worth publishing in a property investing magazine - which one would be most keen, you wonder?
A few days later, the postman arrives with a bundle of letters. 8 individual letters addressed to you from the local council. All with red type showing through the clear plastic window. You’re perplexed about what they could relate to.
You rip the first one open: ‘Council Tax Overdue Notice’. ‘You owe us backdated payments of £330 for Room 1 at 14-16 Ramsey Street, Stourbridge, West Midlands.’ The second letter is identical to the first except for the address ‘You owe us backdated payments of £330 for Room 2 at 14-16 Ramsey Street, Stourbridge, West Midlands.’ Each letter addressed to you as Urgent and Overdue - in respect of council tax for every room in your 8 bed HMO.
‘What’! You exclaim, ‘I don’t owe council tax on these rooms! It’s an HMO. I’ve got the change of use confirmation from the local authority that it’s a Band C building. I’ve been paying Band C council tax since the tenants moved in. What on earth is going on?’
You phone the Council Tax department at the local council to say they’ve made a mistake and they calmly point you to the council tax list, which clearly displays your property as having individually banded HMO rooms - where now, each room is liable for council tax. They’re sorry but there’s very little they can do as the decision is down to the valuation office.
You’re horrified, worried, and confused. How and when did this happen? Who made the decision to re-band the rooms and why were you never told? How will you make profit on your HMO now if you have to pay council tax per room? Should you pass the cost onto the tenants? If so, how? These and other questions start to fly round your head and you wonder whether this was such a great project after all. Now you question whether the revaluation might be in doubt as a result of the re-banding. Perhaps you’ll re-think contacting one of those property magazines just yet.
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This scenario has become all too common with investors. Over the last few months I have listened to the stories of many people who suddenly find that their HMO conversion is no longer being treated as a single dwelling with a single Council Tax banding. Each room is now individually banded for CT purposes. Even taking into account a single person discount, there is now an additional tax due on that room, whether tenanted or not, and someone has to pay it.
The problem is fivefold:
What are the reasons why the VOA might re-band your rooms?
If the LO decides that all four tests are met, then it is highly likely the HMO will be ‘disaggregated’ (that is, separated for CT purposes) and each room will receive their own band for CT. In my next article on this subject in next month’s magazine, I will go into each of these areas in more depth. Suffice it to say that each of these four tests are complex.
There are many pieces of legislation and case law that have tried to ascertain clarity about each of these areas. As a result of such contradictory and confusing legal argument, the VOA has also produced practice guidance to help LOs determine correct outcomes for properties. This itself contains sections which are based on outdated legal evidence which have since been refuted (i.e. Woolway v Mazars in 2015 which was refuted in 2018); legal arguments taken from discussions about commercial buildings (disaggregation and contiguous buildings) and contradictory guidance around definitions such as self-containment and separate living accommodation.
Therefore the VOA has to take a case by case basis, which is inefficient and long-winded.
To reduce the risk of this happening to you, here are some pointers to help you (please note that these can change due to legislative or practice guidance changes at VOA level).
According to the VOA:
You may query the council tax band for your dwelling with the VOA at any time, free of charge. They will look again at whether they believe the band they have put your home in is correct. In some circumstances you may be able to make what is called ‘a proposal’ for a change. An example of when you can make a proposal to change the band is in the first six months after you buy a home.
If you make a valid proposal to the VOA, their listing officer must issue a decision notice about the matter. If you disagree with the decision, there is a right of appeal against the decision notice to the Valuation Tribunal. The Tribunal is completely independent of both the VOA and the council that collects the tax. The Tribunal will make a decision about the correct band for the property on the evidence that you and the listing officer present to it, at the hearing. Here is the flowchart taken from the VOA website:
What if you are already facing re-banding of your rooms, or are wondering about whether to undertake a conversion now, in the face of this risk?
You can start to educate yourself about the risks, and learn about the law surrounding those four areas upon which CT decisions are made:
There have been recent cases where investors have successfully appealed against a re-banding. My own interest in this area grew out of helping a private client fight a re-banding of his six bedroom all ensuite HMO which he went on to win. Simultaneously, I discovered a letter sent to me via one of my HMOs, stating my rooms were not going to be individually re-banded, despite a request from an unknown person to have the rooms re-banded individually. I don’t know who that person was, but as they were not considered to be a relevant party, the request was dismissed by the VOA. Just goes to show some people are not happy about this inconsistency either (whether it was a competitor or a disgruntled tenant perhaps I shall never know).
To support investor-landlords in this legislative and development minefield, I have set up a Facebook group with another HMO investor, Daryn Brewer, who is facing this situation with an HMO of his in Portsmouth. You can join here: https://www.facebook.com/groups/hmoct
We are going to run regular webinars to help people with this area of the law and educate investors about how best to avoid or mitigate their developments. We feel strongly that the rules are being applied inconsistently, disproportionately, and indiscriminately.
Neither of us have legal qualifications - we are investor-landlords helping others to challenge and clarify the aspect of practice so that HMOs can continue to be worthwhile investments both for those who invest in them - and ultimately, for those who live there.
Wendy Whittaker-Large is a prolific property investor who specialises in HMOs. She is an award-winning business owner and mentor and she presents the HMO Success Podcast. She has written two best-selling Amazon books on HMOs and helps others to create profitable HMO portfolios.
You can contact her at wendy@hmosuccess.co.uk or via www.hmosuccess.co.uk
Wendy is an HMO landlord and author. She became involved in the fight against room re-banding in 2021 as a result of supporting one of her clients with an appeal which saw his 6 bed HMO initially re-banded room by room, and then after a successful challenge, returned into a single banding.
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