Buy-to-let landlords are likely to be expected to improve EPC ratings on their rental properties in the coming years, but industry insiders believe the government should offer an incentive.
The vast majority of investors and buy-to-let landlords in the UK private rented sector are now aware of the minimum energy efficiency standards (MEES) currently imposed to ensure properties achieve an energy performance certificate (EPC) rating of E to be let out.
With most UK housing stock currently sitting at a D, this has only been an issue for landlords with the least energy efficient properties, many of which have sold such properties, or upgraded them.
There is currently a cost cap in place for retrofits, which is £3,500 including VAT. Once landlords have spent up to this amount on energy efficiency improvements, if their property still does not achieve the minimum EPC level, they can apply for an exemption to continue to let the property out.
Future EPC proposals
However, there is currently a proposal going through Parliament that will mean rental homes need to achieve a minimum EPC rating of C by 2025 for new tenancies and by 2028 for existing tenancies. With two thirds of rental homes in England and Wales currently rated D or below, this will be a challenge for the sector.
While top EPC-rated properties – particularly newly built ones – are likely to be the most desirable to tenants and potentially attract a rental premium, for those properties that fall far short of the new minimum, landlords may not be able to afford the changes needed for improvement.
As such, think tank E3G has written a letter to the Treasury suggesting that they should incentivise landlords to improve their EPC ratings. This could be done through adding a tax incentive to make retrofitting a property more attractive, which could boost rental supply by keeping more existing homes in the market.
The letter has been backed by the National Residential Landlords Association (NRLA), with chief executive Ben Beadle commenting: “We all want to see rental properties become as energy efficient as possible, but it is crucial that government sets out a clear strategy and realistic time frame on how landlords can make this happen.
“Ministers must assemble a clear, workable financial package to give landlords confidence and clarity as a matter of urgency.”
The letter has also been co-signed by a number of other organisations, including Citizens Advice and Coventry Building Society.
Letter to government
Dear Chancellor of the Exchequer,
Re: Incentivising energy efficiency investment in the private rented sector
We are writing as a coalition of financial institutions, consumer groups, fuel poverty organisations and landlord and letting agent associations to encourage the reintroduction of tax exemptions for energy efficiency improvements made to privately rented properties. This will make investments more attractive to landlords and property agents, while reducing energy bills for renters.
There is a compelling case for boosting energy efficiency in the private rented sector. Citizens Advice highlighted that renters face widespread problems with damp, mould and cold, with 1.6 million children exposed to these conditions.
Around two-thirds of privately rented properties in England and Wales fall below EPC C, the government’s target rating for all fuel poor homes by 2030.
There is evidence that tax incentives could help make investments more attractive, incentivising retrofit. Recent survey evidence from Propertymark, the UK’s leading professional body for property agents, shows that nearly 70% of agents think that support should extend to allow energy efficiency improvement to be offset against capital gains tax.
A simple tax restructuring to allow energy performance improvements to be deductible against rental income could help make investment more attractive for landlords. Individual landlords currently pay income tax on their rental properties at the same rate as other earned income.
Before they work out how much they will be taxed, landlords may deduct costs of managing the property, legal fees, replacement furniture, insurance, utility bills, ground rent and maintenance and upkeep – but not energy saving improvements. We encourage this allowance to be expanded to include expenditure on improvements that result in an increase in the Environmental Impact Rating of the property, or included in an agreed list of measures (i.e., loft insulation, cavity wall insulation, etc). This would represent a maximum tax revenue foregone of £1.2bn to 2028, or around £0.24bn per annum over 5 years.
This simple tax change could drive investments that bring about significant energy bill savings for renters and support a shift towards higher standards, helping meet fuel poverty targets. We would be pleased to discuss this further.
E3G, The National Residential, Landlords Association (NRLA), Propertymark, Nationwide Building Society, Citizens Advice, Coventry Building Society, Homes For Good, National Energy Action, Paragon Bank