The loophole has been exploited by residents on a small, newly built estate in West Sussex who found that the builder, Crest Homes, had sold 27 of the 39 homes to a housing association.
The private owners in Dorset Gardens, East Grinstead, successfully petitioned the Valuation Office, a branch of the Inland Revenue, for the reduction. They argued that the value of their homes fell after the sell-off to the Hyde Housing Association.
However, the claim that the influx of 'undesirable' tenants had caused the price of their properties to collapse risks stoking ill-feeling between different residents on the same estate.
The residents won a cut in their own council tax band from band D - pounds 68,000 to pounds 88,000 - to band C - pounds 52,000 to pounds 68,000 - resulting in a reduction of more than pounds 56 in tax for the current year. From April, the difference in bands will be pounds 60.89.
However, some of the homeowners in Dorset Gardens would rather have paid the tax at the higher rate, as long as Crest had not sold the remaining homes to the housing association.
Cynthia Dowsett, a medical laboratory worker who bought privately, explained: 'It was advertised as a select private estate. That was one of the reasons why I moved here.
'At the same time, Crest must have been negotiating with the housing association to sell the rest of the homes off. I have nothing against the tenants but effectively it is like a council estate.
'If people want to live on a council estate they can buy a house on one.'
Ms Dowsett said that when residents demonstrated outside other Crest estates, the builder put up signs promising not to sell the homes to another housing association. An initial offer of pounds 3,000 compensation per household was rejected by the Dorset Gardens residents and later withdrawn by the builder.
Tony Halsey, the company secretary at Crest, said: 'It was the houses themselves that were advertised as being select, not the people who live in them. We sell to whoever comes along with the money. All the houses were built to the same standard.'
No one from Hyde Housing Association was willing to comment on the case. Jim Coulter, director of the National Federation of Housing Associations, said this was the first recorded case where one of his members was blamed for falling house prices. In the past four years, housing associations have bought more than 18,000 properties throughout the country.
Mr Coulter said: 'Our acquisitions meant that property values have held up more than they might have done. I cannot understand why there is a material effect when housing association tenants move into a place. It does seem like rather surprising prejudice.'
Jan Ash, 29, is a housing association tenant on the estate. Her husband Andy is employed by a flight catering company at nearby Gatwick Airport, while she works part-time at a local florist.
She said: 'If you looked at the houses you would never know which are private and which are not. They are just the same.
'I suppose it's a good thing that the cost of the council tax has come down for everyone, although it is a bit of a shame that it had to happen this way.'
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