New research suggests that higher council tax charges on second homes may be having the opposite effect to what many local authorities intended.
According to analysis from Colliers, second home council tax premiums are now costing the public purse an estimated £383 million every year, as more owners move their properties into the business rates system instead.
The firm argues that attempts to increase taxation on second homes are encouraging owners to reclassify their properties as holiday lets, allowing many to legally avoid paying both council tax and business rates altogether.
Councils increased second home charges
In recent years, many councils across England and Wales have introduced higher council tax premiums for second homes in an effort to raise additional revenue and discourage underused housing.
According to Colliers, around 85% of local authorities in England and 91% in Wales have now implemented higher charges on second homes.
However, the policy appears to be creating unintended consequences.
Rather than paying increased council tax bills, some second home owners are reportedly shifting their properties into the business rates system by meeting the criteria required for holiday accommodation.
How the loophole works
In England, a property can qualify for business rates instead of council tax if it is available to let as holiday accommodation for at least 140 days each year and actually let commercially for a minimum of 70 nights.
Once a property enters the business rates system, owners may become eligible for small business rates relief.
If the property’s rateable value falls below £12,000, owners can often claim 100% relief, meaning they pay neither business rates nor council tax.
Properties valued between £12,000 and £15,000 may also qualify for partial relief on a sliding scale.
The rules are stricter in Wales, where holiday properties must be available to let for at least 252 days annually and rented commercially for 182 days within a 12-month period.
Even so, Colliers says the number of properties qualifying for full relief continues to rise.
Holiday let numbers continue climbing
The research found that the number of holiday lets in England and Wales eligible for full business rates relief increased to 77,241 in 2026/27.
That figure is up from 73,838 the previous year, representing annual growth of 4.4%.
The South West continues to have the highest concentration of affected properties.
According to Colliers, Cornwall, Devon, Dorset and Somerset now contain 22,970 holiday lets claiming full business rates relief.
That is an increase from 21,678 the year before.
The firm estimates these properties are currently contributing neither council tax nor business rates locally.
Cornwall among the hardest hit
Cornwall alone reportedly accounts for 11,450 of these properties.
Colliers estimates that this represents an annual loss of around £59 million for the local authority.
Over a five-year period, the total amount potentially lost could exceed £180 million.
Elsewhere, North Yorkshire is estimated to have 5,910 properties in the business rates system with rateable values below £12,000, meaning those owners are also paying no council tax or business rates.
Colliers says this represents another £30 million in lost revenue for the local authority this year.
Experts say policy is distorting behaviour
John Webber said the current approach is unintentionally encouraging second home owners to change how their properties are classified.
He argued that many owners are simply responding to government policy and using the legal options available to them.
Webber said the system effectively creates two extremes, where owners either face significantly higher taxation or no taxation at all depending on how the property is categorised.
According to him, this is distorting behaviour and weakening councils’ ability to raise local revenue.
Pressure growing on local authorities
The findings come at a time when many councils are facing growing financial pressure.
Local authorities are already dealing with rising service costs, housing shortages, and increasing demand for affordable homes.
Second home council tax premiums were originally introduced partly to help councils generate additional funding while discouraging properties from sitting empty for large parts of the year.
However, Colliers argues that the current structure may actually be reducing the amount of money collected locally.
While some councils may receive compensation from central government, the firm says less revenue is still being generated directly from affected properties.
Calls for reform
Colliers is now calling for a wider review of both the council tax and business rates systems.
The firm believes changes are needed to close loopholes and create a fairer and more balanced approach to property taxation.
Webber warned that the current system is not sustainable in the long term and argued that policymakers need to rethink how second homes and holiday lets are taxed.
He also suggested that blaming second homeowners for wider housing shortages does little to solve the underlying issue of insufficient housing supply across the UK.
Debate over second homes likely to continue
The issue of second homes remains highly controversial in many parts of the UK, particularly in popular tourist areas where local residents often struggle with affordability and limited housing supply.
Supporters of higher council tax premiums argue that second home owners should contribute more towards local services and housing pressures.
Critics, however, believe the current approach is too simplistic and may be creating unintended financial consequences for councils.
For now, the latest research suggests that attempts to raise more money through second home taxation may instead be encouraging more owners to move into a system where little or no tax is paid at all.
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