What are the EPC regulations for landlords?

What are the epc regulations for landlords?
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    Disclaimer: This article is based on legislation which was correct at time of publishing on September 20, 2022
    This page was last updated on September 22, 2022

    There has been a recurring theme in the conversations I have had with landlord clients in recent years.

    In addition to the adverse changes to mortgage interest relief and Capital Gains Tax, more and more Regulations are being imposed on the market and tenants (particularly through recent periods of lockdown) are perceived as having the advantage over the property owner.

    Who is responsible for EPC landlord or tenant?

    Unfortunately, landlords in the private residence sector are about to face a deluge of further regulations. A White paper published in June covers proposals to tighten up the standard of property in the private rental market, which further extends the rights of tenants.

    Whilst the White paper is couched in terms of targeting unscrupulous landlords, inevitably all landlords will be impacted by proposals that impose a minimum standard of repair, portable deposits and abolition of no-fault evictions.

    However, the new energy efficiency proposals are likely to have a far wider impact.

    Sales or rentals of residential property have required an Energy Performance Certificate since 1 October 2008, with properties considered to be the most energy-efficient graded A and the least efficient graded G.

    From 1 April 2018 rental property was required to have an EPC rating of E or above. As part of the government’s ambitious climate change target of reaching net zero for emissions by 2050, this expected rating for property in the England and Wales rental market is currently under review in the Minimum Energy performance of buildings (No 2) Bill which began its journey through Parliament in May 2022.

    The Bill, as proposed, applies to all domestic property, with a target of achieving an energy rating of C or above by 2035 and non-domestic property rated B or above by 2030.

    Proposals include requiring mortgage lenders to have an average rating of C or above across their domestic portfolios by 31 December 2030, and requiring landlords of domestic premises to upgrade their properties to a C rating or better by 1 April 2028, with new tenancies commencing after 1 April 2025 being required to meet this target.

    Is there a legal requirement on domestic rental property energy efficiency?

    It is estimated that 15% of UK greenhouse gas emissions are generated by residential property.

    Whilst new build houses have been subject to stringent energy efficiency requirements under building regulations since 2012, the vast majority of domestic property in the UK is older stock, much of which rates poorly for energy efficiency.

    The Private rental sector in England and Wales comprises 5 million homes, with an estimated 67% of the properties being rated below grade C. The government’s target is therefore going to require a significant investment.

    The improvements being suggested include solar panels and heat exchange pumps to replace gas boilers. Plans to phase out gas boilers by 2025 have been in place for a while, but this applies only to new houses.

    Houses built before 2025 will be able to continue to use gas boilers, but most new boilers are capable of using both natural gas and Hydrogen which is set to replace natural gas at some as yet undesignated date.

    British Gas are confident that natural gas will still be available for the remaining useful life of existing gas boilers.

    The advice being given to landlords is to have EPCs updated, and this will include suggestions on how to upgrade the efficiency rating. Some of the changes can be quite simple, such as switching light bulbs for low-energy products.

    However, anecdotal evidence indicates that costs are likely to be as much as £30,000 to £40,000 per property.

    The 2018 energy efficiency regulations capped the expected minimum outlay for improving properties to an E rating to £3,500 including VAT. The 2020 consultation document on plans for the 2030 efficiency target proposed a cap of £10,000 including VAT, but the cap in the Bill now presented to Parliament has increased to £20,000 including VAT.

    The Bill provides that where it is not economically viable to upgrade a property there will be a 5 year exemption available. However, this exemption will only apply if the landlord has spent £20,000 on viable changes.

    For most domestic rentals this cap is likely to exceed 12 months of gross rental income, and this is on top of the loss of rents if the property needs to be empty whilst the work is carried out.

    It is not clear from the draft legislation what happens at the end of the 5 year exempt period, but the expectation must be that further investment is required to upgrade the property at the end of the exempt period.

    How will EPC affect commercial property?

    The requirement for non-domestic buildings to improve their ratings is even stricter, with EPC banding of B to be achieved. However, the same cap on expenditure applies and the building is also exempt from the regulations if it is not technically feasible to make the changes to achieve a B rating.

    If we assume that the work required to upgrade a commercial property is likely to cost multiple of times the cost of upgrading a domestic property, the expectation must be that commercial property will be upgraded over a longer period, albeit that the expected deadline for achieving that rating is likely to be only two years after the deadline for residential property.

    Does EPC rating affect residential mortgage?

    Bringing mortgage lenders into the effort to improve the housing stock is an interesting move.

    The national housing stock is overwhelmingly below the desired energy rating so without any further intervention, lenders could well refuse to lend against older properties. What effect would this have on the housing market?

    It could give rise to a two-tier market. Newer properties would be more desirable to both buyers and lenders, and therefore we could see sharp price increases with demand for these being driven up.

    However, older properties that have yet to be upgraded could be difficult to sell, potentially depressing the value of these less efficient properties.

    Recent history has thrown multiple problems at the economy which will take some years to work their way out of the system. It is unlikely that any government will want to add a housing market slump into the equation, and some commentators in the property sector envisage loans at favourable rates targeted at the upgrade work to be carried out.

    Green grant schemes have had little success so far and are mostly now expired, but with the government deciding to take a stick to house owners, the grant carrot may now be a useful and attractive tool to drive forward the housing stock policy.

    Is there tax relief available for EPC upgrades?

    Given the sums of money involved in upgrading the property, the availability of an income tax deduction may be critical to the landlord’s finances.

    Whether the property is commercial or domestic, the costs the landlord incurs in carrying out repairs during the period of a tenancy are deductible from the profits arising from the tenancy.

    However, where remedial work required under these new energy efficiency provisions will be disruptive, landlords may well opt to wait for the end of a tenancy to carry out the work. Where there is a portfolio of rental properties HMRC pool the results and accepts that there will be an ongoing business, even whilst one property is temporarily empty.

    Costs that are classified as repairs which are incurred between lets in a multiple property portfolios are therefore allowable as a deduction from income.

    The situation is less clear when there is no portfolio and the landlord has only a single rental property. HMRC manuals at PIM2510 state that HMRC would not normally take the view that a rental business had ceased if there is a gap of fewer than three years between tenancies in a landlord’s sole rental property.

    However, this three-year gap is an arbitrary period decided by HMRC and has no statutory basis. The manual admits that this time frame is for guidance only.

    As tax advisers we are aware that tax cases are littered with situations where HMRC have argued that they are not bound by their internal guidance and courts have denied that HMRC’s interpretation of statute represents the legal position; therefore there is no guarantee of a deduction against income.

    What expenses could be counted?

    With such a high level of outlay required to meet the legal obligations, it will be prudent to manage a client’s expectations on the deduction of costs as a Revenue expense.

    We should also not overlook the distinction between Revenue and Capital expenditure.

    Whilst the major case law distinguishing between Revenue and Capital was established decades ago, and the debate is revisited on a regular basis in tax tribunals, demonstrating that it is far from straightforward.

    Mending a broken window or replacing insulation that has become compacted over the course of time is quite clearly repair or replacement of an existing item so that we can expect the cost to be allowed against income.

    It is also well established that HMRC will accept replacing an existing asset with the modern equivalent does not necessarily represent capital improvements and helpfully cites the example of Double Glazing replacing single glazing as the modern building standard at BIM46925 in illustration.

    However, if the recommended work is to install cavity wall insulation or underfloor heating, for example, it is difficult to argue that the work is a repair since there is no equivalent in existence before the work is carried out.

    Interpreting the legislation strictly would deny an income tax deduction for the cost incurred. Whenever a revenue deduction is denied for business expenditure, the next best option is to claim Capital Allowances, but Section 35 CAA 2001 denies Capital

    Allowances for Plant and Machinery in a dwelling house, unless the property qualifies as a Furnished Holiday Let. The vast majority of residential properties will not be eligible for Capital Allowances.

    As things stand, much of the expenditure that will be incurred by landlords is not going to be deductible from income.

    Although the work will likely be accepted as an improvement to the property and allowed for Capital Gains Tax purposes, this is little consolation for a landlord that has been required to spend a year’s worth of income merely to be able to continue their business.

    However, there is precedent for extending relief to expenses that are necessary to comply with regulatory changes, such as the allowances that applied to fire safety equipment up to April 2008 and relief was previously given for energy efficiency improvements through the Landlords

    Energy Savings Allowance under Sections 312-314 ITTOIA 2005 before April 2015. As the government is pushing an energy-saving agenda, relieving the costs being imposed against income tax would be a significant encouragement to landlords.

    For many landlords, this new burden will be the final straw, without even throwing Making Tax Digital into the equation, so that we could see an uptick in sales of rental property.

    Depending on how quickly buyers become aware of the coming issues of selling on or mortgaging property it may become difficult to achieve the full expected value on sale.

    Don’t forget the 60 day CGT Return, as there are still many solicitors and estate agents who are not making their customers aware of the requirements.


    As a rule, I am usually loath to advise on proposed legislation that has not been ratified – so much can change in the process – but I am writing this article as the UK struggles with record high temperatures, whilst on the other side of the world Sydney has been hit by as much rain in 3 days as London normally sees in a whole year.

    It is difficult to deny these “abnormal” weather patterns are coming around more regularly and scientists tell us the planet is close to, if not over the point of no return on climate change.

    Given that the Minimum Energy performance of buildings (No 2) Bill reflects the aspirations voiced in 2019 manifestos by all major parties, it seems inevitable that the legislation will make its way through the various hearings in some form or other, irrespective of the colour of the government of the day.

    We can only hope that at some point the positive role tax relief could play in the process will be recognised.

    Please call or email us at Butt Miller, we’d be delighted to help.

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