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Business Services  •  Business Tax  •  Personal tax

Are new energy efficient improvements on buy-to-lets tax deductible?

By RJP LLP on 28 July 2022

Having buy-to-let property is already challenging enough for landlords as a result of all the tax policy changes that have made it less financially attractive. Now, new energy efficiency requirements could result in a Catch 22 situation for landlords who may face thousands of pounds in costs to upgrade, or potentially the prospect of selling their properties because the upgrade costs to comply outweigh the benefits of retaining their investments.

All existing homeowners in the UK have until 2035 to bring their properties into line with new minimum energy efficiency requirements or EPC ratings. All homes will need to be ‘C’ rated by 2035, whereas currently, just over 40% comply in England. For landlords, the timeframe set could be much tougher and they will need to comply sooner. Properties will likely need to be ‘C’ rated by 2025 for landlords entering into a new tenancy agreement and by 2028 for rentals covered by a pre-existing tenancy agreement. Government figures suggest that only 15% of rental homes will comply and the exact dates for making these improvements are to be confirmed very soon, following a recent consultation.

There are lots of ways a property can be made more energy efficient and many of the improvements can ultimately be tax deductible as capital expenditure. However, this means the expense will not automatically be eligible for tax relief until the property is sold and the costs offset against any gains. Obviously this is not particularly helpful for the investor landlords who intend to retain their properties. This tax situation arises due to the nature of many energy rating upgrade works being a ‘home improvement’ and not a ‘like for like’ replacement; the latter being covered for tax relief under the wear and tear allowance.

Options for improving a home’s energy efficiency include adding insulation, double or triple glazing, draft proofing, installing a condensing boiler, fitting low-energy lightbulbs or installing renewable energy sources such as solar panels or wind turbines. Specialist advice is needed before making any investment to check whether the cost could qualify for wear and tear allowance because typically a slight change will be excluded. For instance, if your rental property currently has a traditional boiler and you fit a condensing boiler, this would usually be classed as an improvement, but you may be able to claim at least part of the cost as wear and tear.

In addition, many properties owned by buy-to-let landlords are old and retrofitting these improvements, for instance renewable energy sources, could be more costly than in a newer property.

Landlords have already needed to achieve an EPC ‘E’ rating to rent their properties following legislation that came into force in April 2020. At the time it was possible to obtain an exemption to this requirement if they had invested £3500 on energy efficiency improvements and the property still failed. Now there are proposals for a similar policy but with the exemption threshold raised to £10,000.

Research by the lender Paragon has highlighted that many landlords are either unaware of what is coming down the line (42%) and 28% don’t understand the implications. Other landlords have estimated that the average cost to bring a currently E rated property up to the C rating will easily reach £10,000 or more, and there is the prospect that less energy efficient homes will become harder to rent out, creating more uncertainty because people are trying to minimise their energy bills.

Smaller landlords are already finding the business of renting property tougher, with the stamp duty surcharges and lost mortgage interest tax relief. All this extra pressure could mean smaller buy-to-let investors start to sell and exit the marketplace, but this has far reaching consequences that are already being felt in the housing market.

The National Residential Landlords Association is lobbying for landlords to be able to offset the costs of any energy efficiency improvement work using the wear and tear tax allowance for general repairs and maintenance and to have a council tax exemption when properties are empty during energy improvement works. We will be monitoring the situation closely and reporting on the outcomes for landlord clients in the coming months.

In the meantime, if you are a residential landlord and considering whether improvements to your property are tax deductible, contact us for further advice via partners@rjp.co.uk.

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Having buy-to-let property is already challenging enough for landlords as a result of all the tax policy changes that have made it less financially attractive. Now, new energy efficiency requirements could result in a Catch 22 situation for landlords who may face thousands of pounds in costs to upgrade, or potentially the prospect of selling their properties because the upgrade costs to comply outweigh the benefits of retaining their investments.

All existing homeowners in the UK have until 2035 to bring their properties into line with new minimum energy efficiency requirements or EPC ratings. All homes will need to be ‘C’ rated by 2035, whereas currently, just over 40% comply in England. For landlords, the timeframe set could be much tougher and they will need to comply sooner. Properties will likely need to be ‘C’ rated by 2025 for landlords entering into a new tenancy agreement and by 2028 for rentals covered by a pre-existing tenancy agreement. Government figures suggest that only 15% of rental homes will comply and the exact dates for making these improvements are to be confirmed very soon, following a recent consultation.

There are lots of ways a property can be made more energy efficient and many of the improvements can ultimately be tax deductible as capital expenditure. However, this means the expense will not automatically be eligible for tax relief until the property is sold and the costs offset against any gains. Obviously this is not particularly helpful for the investor landlords who intend to retain their properties. This tax situation arises due to the nature of many energy rating upgrade works being a ‘home improvement’ and not a ‘like for like’ replacement; the latter being covered for tax relief under the wear and tear allowance.

Options for improving a home’s energy efficiency include adding insulation, double or triple glazing, draft proofing, installing a condensing boiler, fitting low-energy lightbulbs or installing renewable energy sources such as solar panels or wind turbines. Specialist advice is needed before making any investment to check whether the cost could qualify for wear and tear allowance because typically a slight change will be excluded. For instance, if your rental property currently has a traditional boiler and you fit a condensing boiler, this would usually be classed as an improvement, but you may be able to claim at least part of the cost as wear and tear.

In addition, many properties owned by buy-to-let landlords are old and retrofitting these improvements, for instance renewable energy sources, could be more costly than in a newer property.

Landlords have already needed to achieve an EPC ‘E’ rating to rent their properties following legislation that came into force in April 2020. At the time it was possible to obtain an exemption to this requirement if they had invested £3500 on energy efficiency improvements and the property still failed. Now there are proposals for a similar policy but with the exemption threshold raised to £10,000.

Research by the lender Paragon has highlighted that many landlords are either unaware of what is coming down the line (42%) and 28% don’t understand the implications. Other landlords have estimated that the average cost to bring a currently E rated property up to the C rating will easily reach £10,000 or more, and there is the prospect that less energy efficient homes will become harder to rent out, creating more uncertainty because people are trying to minimise their energy bills.

Smaller landlords are already finding the business of renting property tougher, with the stamp duty surcharges and lost mortgage interest tax relief. All this extra pressure could mean smaller buy-to-let investors start to sell and exit the marketplace, but this has far reaching consequences that are already being felt in the housing market.

The National Residential Landlords Association is lobbying for landlords to be able to offset the costs of any energy efficiency improvement work using the wear and tear tax allowance for general repairs and maintenance and to have a council tax exemption when properties are empty during energy improvement works. We will be monitoring the situation closely and reporting on the outcomes for landlord clients in the coming months.

In the meantime, if you are a residential landlord and considering whether improvements to your property are tax deductible, contact us for further advice via partners@rjp.co.uk.