Colliers said councils in the UK introducing higher council tax charges on second homes failed to boost revenues but instead encouraged second-home owners to change ownership structure.
Some 85% of local authorities in England and 91% in Wales charge up to a 100% council tax surcharge on second homes, a measure introduced in April last year.
Current rules state that owners in England who let their properties for 140 days per year and let them commercially as self-catering accommodation for at least 70 nights can claim as a small business and therefore pay business rates instead of council tax.
This allows them to then claim for 100% of the business rates payable if the rateable value of the property is less than £12,000. This could mean that no business rates or council tax is paid on some properties.
Owners with a rateable value between £12,000 and £15,000 can also receive relief on a sliding scale.
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In Wales, the rules are tighter, as a property must be a self-catering unit available for commercial let for at least 252 days, and actually let for at least 182 days within a 12-month period.
The research found that the number of holiday let properties eligible for 100% business rates relief had risen 4.4% since last year, from 73,838 to 77,241.
Colliers said local authorities were missing out on around £383m per year by imposing this tax on second-home owners and leading them to transition to holiday let.
John Webber, head of business rates at Colliers, said: “The figures show the short-sighted policy of trying to extract money from those with second homes is backfiring. They indicate that introducing higher council tax on second homes is simply encouraging more owners to ‘flip’ into the business rates system.
“Most people will happily pay what they have to pay, but the politics of envy is forcing people to move to business rates once they meet the criteria – the government policy means they will then pay nothing – we blame the government for this, not people with second homes.”
South West hardest hit by holiday let tax relief
Colliers found that the impact of this was most felt in the South West of England, where 22,970 holiday let properties in Cornwall, Devon, Dorset and Somerset were claiming full business rates relief. This was up from 21,678 last year, showing an increase in properties paying neither council tax nor business rates.
It said that if these properties did pay council tax, where second homes are subject to a 100% surcharge, local authorities in these counties would raise an additional £119m each year.
This is most prevalent in Cornwall, where the number of properties not paying business rates or council tax has risen from 10,731 last year to 11,450 this year.
Colliers estimated this at a loss of £59m for Cornwall, which could have generated more than £180m over five years to support local services and housing.
In North Yorkshire, 5,910 properties have entered the business rate system with rateable values below £12,000 and therefore pay no business rates or council tax. Colliers said this equated to £30m in lost council revenue.
Housing policies missing the mark
Colliers warned that policies were failing to meet their objectives as the council tax surcharge intended to discourage second-home ownership and make more housing available, but were reducing local authority income instead.
It said councils could be compensated by central government, but this still meant money was not being generated for local services.
Webber added: “Although tighter measures are in place than in the past, they do not prove a strong enough deterrent to stop second-home owners from flipping their properties into the Rating List and avoid paying the tax, particularly in England, where owners only need to let out their property for 10 weeks of the year.
“The fact that the numbers doing this are increasing shows that these ridiculous short-sighted policies are not working. Offering either double taxation or no taxation at all is not a sustainable approach. It distorts behaviour and undermines the ability of local authorities to raise vital funds. It certainly isn’t funding affordable housing for locals.”
Webber said blaming second-home owners for the government’s inability to build enough homes then using the tax system to penalise them was “not only short-sighted” but was “raising less money”.
Colliers said there needed to be a “fundamental review” of the business rate and council tax systems to close loopholes, ensure fairness and protect local government finances.
Webber added: “Most second-home owners would accept paying a fair level of council tax. The real issue is a system that allows such extreme outcomes – either double tax or none at all – at a time when public services are under increasing pressure. The government should reform the whole system – and do it thoroughly.”
