Improving EPC ratings should have tax benefits

There are growing calls for homeowners to be rewarded for improving the green credentials of their properties by getting favourable tax treatment.

As explored last week, landlords are facing a struggle to improve the EPC rating of their homes ahead of a potential deadline of 2025.

Carbon-based gas boilers are also being phased out on new builds in 2025, but installing heat pumps is incredibly expensive, with ground-based pumps costing up to £18,000.

James and Tatiana Tanner

James Tanner, along with his wife Tatiana, has invested in upgrading a 100-year old Edwardian Home in Muswell Hill, London. By conducting a variety of works he managed to improve its EPC rating from a G to a B.

But he thinks doing so shouldn’t be unusual – landlords and owner occupiers should be incentivised to upgrade their homes up and down the country.

Tanner said: “The British government wants to encourage everyone to make homes more sustainable and energy efficient, but they are not giving incentives to do it.

“If a landlord spends £20,000 on improving their property’s EPC rating the expenditure isn’t tax deductible – it should be.

“Your average landlord is not going to be able to fund this unless there’s some incentive or tax break to do it – it’s too much money.

“The number one thing is to class it as a revenue item, not capital expenditure.”

Sajjad Nawaz
Revenue vs Capital Expenditure

As explained by Sajjad Nawaz, owner of Buy to Let Tax Accountants, under the current system if you are conducting repair and maintenance on a property it’s classed as a revenue item, meaning you can write it against your profits when submitting your income tax return.

However simply upgrading a property is classed as capital expenditure, which is only taken into account when capital gains tax is calculated if you sell the property.

If you earn £35,000 before tax and spend £20,000 on upgrading your property, the difference is night and day in terms of how much you’ll be taxed.

If classified as capital expenditure you’d pay tax on the full £35,000, but if it was classed as a revenue item you’d only be taxed on £15,000 (£35,000-£20,000), a saving of £8,000 on your tax bill if you’re a higher rate taxpayer.

This talk isn’t new, as the National Residential Landlords Association (NRLA) has been campaigning for favourable tax treatment to transform the energy efficiency of homes for years.

In February this year the association said: “The NRLA is proposing that energy efficiency measures carried out by a landlord should be offset against tax at purchase, as repair and maintenance, rather than as an improvement at sale against Capital Gains Tax.”

The subject is gathering steam because, subject to government consultation, landlords will need to get properties up to an EPC rating of C by 2025 if they want to issue a new tenancy agreement.

Green Homes Grant

The government launched the Green Homes Grant in September 2020, which offered grants of between £5,000 and £10,000 to cover two thirds of the cost of putting in insulation or low-carbon heating.

However the scheme was a failure, owing to poor management and a lack of accredited engineers, and it ended up being scrapped in January 2021.

It’s understood that there is some inclination within government to launch a new version.

It remains to be seen whether tax incentives could form part of the Green Homes Grant mark 2.

Liz Syms
Loans to upgrade properties

Liz Syms, owner of Connect Mortgages, is in agreement with James Tanner and the NRLA that the government should do more to help homeowners improve EPC ratings.

She said: “Getting all properties up to a C rating by 2025 is going to hit a lot of properties and investors.

“It would certainly help for there to be some kind of tax incentive.”

Syms is active in securing landlords funding to improve properties that require significant upgrades before being let out.

If a home has an EPC rating of G or F you typically can’t get a regular mortgage on it, and need to turn to more specialist lending products.

One such product is called a ‘bridge-to-let’, effectively a short-term bridging loan that gets converted into a buy-to-let mortgage once the works are complete.

Such mortgages are available from the likes of Precise Mortgages and Hampshire Trust Bank.

James Tanner reckons mortgage products enabling you to get extra funding to bring a property’s EPC rating to C will become commonplace in the years ahead, which may eliminate the need to use bridge-to-let in some cases.

Beware of the charlatans

Improving a property’s EPC rating can be a big challenge, as you need to find the right tradespeople and/or architects to help make it happen.

James Tanner made extensive changes to his Muswell Hill property with help from a graduate from the Centre for Alternative Technology (CAT), an educational charity training people on green issues.

After hiring the CAT graduate he upgraded his property’s windows with double glazing, draft proofed the windows and front door, added PV solar panels, added underfloor insulation, put in internal wall insulation and basement insulation, and blocked off all but one of the property’s chimneys with a chimney balloon.

Tanner seems worried that some architects and tradespeople could exploit landlords looking to upgrade homes, so he offered a word of caution.

He added: “There are lots of charlatans – they can take advantage of landlords if they realise you don’t know what you’re talking about.

“CAT has got lots of graduates in renewable energy. There’s a whole army of people who can help people there.

“Landlords need to use a graduate from CAT or a really good architect who’s not going to rip you off.”

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