UK tax exemptions for property energy efficiency improvements

The UK has a ‘policy gap’ in its implementation of energy efficiency measures for both domestic and commercial consumers. Since the demise of the domestic Green Deal and a series of rather ‘confusing’ Government set of policies since late 2015, the energy efficiency sector lacks the right incentives for large scale take-up of measures that could improve the existing energy inefficient properties.

Energy efficiency take-up needs to improve as the UK still has one of the most energy inefficient property stock in the whole of Europe and millions still remain in fuel poverty.

Financial schemes for energy efficiency property improvements

We have energy audited a high number of buildings both in both domestic and commercial sectors in the big metropolitan areas (London, Glasgow, Manchester, Birmingham, etc) and have interviewed 1000s of residents in those buildings, and our results have produced a profile which confirms that the quality of energy efficiency in the UK property sector is fairly low compared to some of our European partners. The feedback from the residents that occupy those buildings has been fairly consistent – most concluding that there is currently a lack of financially attractive incentives to help manage the upfront cost of installing the energy efficient measure improvements in the first place.

Financial incentives for energy efficiency investment usually take the following formats:

    • Financial property improvement loan (commercial rates);
    • Pay-as-you-save schemes (Green Deal Finance, PACENow, etc)
    • Grants & subsidies (FiTs, RHI, GDHIF, etc)
    • Tax exemptions, credits or reductions.

Previous blogs have covered pay-as-you-save finance schemes and government grant incentives in quite a bit of detail, but in this publication we are evaluating tax exemptions and the energy efficiency as a standalone subject area.

Why are tax exemptions for energy efficiency improvements back on the agenda?

Tax exemptions are back on the agenda because they appear to be the least controversial area to talk about when dealing with energy policy. Subsidies like the Green Deal Home Improvement Fund, FiTs, RHI and other green grants have been criticised heavily in the past for being ‘too expensive’ for the tax payer. On the other hand, the tax exemptions or credits back to the individual for investing in energy efficiency measures have proven to be popular in other western economies, most notably the United States. Therefore we understand why it’s easier for policy makers to be talking about them with more enthusiasm in the current economic climate.

The tax system has been cited by the Policy Exchange (a prominent thinktank) as the best way to incentivise new home owners to be rewarded for purchasing an energy efficient home. The independent report calls for a £5,000 stamp duty cut for any new home buyer buying a new property that has a good energy efficiency rating. On the other hand, customers should be penalised for the same amount (£5,000 additional stamp duty) for purchasing a property that has a poor rating – in the end the policy should be tax neutral.

We believe this is a step in the right direction and according to the research, this policy change (were it to go through) could help some 270,000 home owners move into more energy efficient dwellings.

However according to government statistics, in the UK in 2015 some 1.3m properties were exchanged both in the domestic and commercial sectors. 270,000 homes marked as energy efficient are only a small fraction of the total portfolio being exchanged – therefore the question is: what happens to occupiers who inherit or live in an existing property that has a poor energy efficiency rating?

Also, the £5,000 stamp duty cut would only apply to high value properties and not to moderate sized family homes, which would only see a fraction of that rebate.

What can we learn from previous tax exemption schemes in the UK?

Landlord Energy Saving Allowance

Up until April 2015, landlords in England & Wales were able to claim a tax deduction from their annual self-assessment if they had invested in energy efficiency measures on their properties. This scheme was know as the Landlord’s Energy Saving Allowance and is now closed.

It is difficult to know how successful this scheme actually was but the £1,500 help it offered landlords was certainly an incentive that had all the right intentions for potential energy efficiency improvements.

5% Reduced VAT on energy efficiency improvements

The installation of many energy efficiency measures such as insulation, solar panels, heat pumps and energy efficient heating controls qualifies the customer for a reduced 5% VAT rate and any other associated works to have that installed. This has helped 1000s of consumers avoid the full VAT charge and certainly helped make energy efficient investment decisions more likely.

However, this policy tool may soon be consigned to the scrap heap as it has been successfully challenged by the European Union competition bodies and deemed in breach of the council directive/s. Our advice is: if you are planning an external wall insulation installation or an expensive biomass boiler then this is the time to move forward with the decision before the VAT rate is moved back to the standard rate.

While these are the most common examples where tax exemptions were applied in the UK system, other examples are few and far between. The tax exemption model as previously mentioned has been more widely used in the United States and it has been applied at both national and local levels.

Tax exemptions that could make a difference

While stamp duty is a taxation that could impact the energy efficiency of a property on exchange, other help through the tax system should be explored to help millions of other property owners or occupiers move forward.

Tax allowance for self-assessments

Like the LESA that worked for landlords in the past, perhaps it is time for a universal allowance that would take into account energy efficiency improvements made by all owners. Therefore even capping this to up to £500 per year for insulation upgrades, energy efficient heating systems and renewable system investments would be a start to help stimulate a national drive towards energy efficiency.

The issues here would be the admin headache for millions of self-assessment tax payers and the tax bodies that are there to enforce these financial benefits.

Council tax rebates

Council taxes are extremely important to fund local services, and changes seen here to reduce what people pay based on how energy efficient the home is would certainly make many sit up and take notice.

To do this the mechanism for rating the energy efficiency of the properties, the energy performance certificate (EPC) could become the key tool here to determine how much of a council tax reduction the consumers could be entitled to.

However, although the EPCs are now quite common for buying and selling a property, the issue is their validity and accuracy. Whilst an EPC in theory can be valid for 10 years, the underlying assumptions used to derive property energy efficiency have changed over the years. Therefore an EPC issued in 2008 can have a considerable difference in rating even if the same date was used to derive the same certificate but with 2016 software. Therefore some sort of timeframe should be put onto the issue date of when the EPC could be used.

Finally, it is worth mentioning that council tax has been one of the toughest forms of taxation to reform over the years. Therefore it will need a lot of political will from both central and local Governments to see any changes any time soon.

Reduced VAT for labour element on ‘energy saving’ measures only

The actual EU Court of Justice ruling specifically states that it deems it be ‘illegal’ for the reduced VAT rate to be applied to measures where materials are the largest element of the cost of the renovation works to private dwellings; however this won’t necessarily also apply to the labour element of the project. For example, while measures such as solar PV, solar thermal and heat pumps will be severely affected (as the cost of the kit is pretty high), external wall insulation installation could still benefit from an amended policy as the labour element is the most significant part of the cost of the job.

The Government’s final position will be clarified post-Budget 2016.

Reforms to UK Consumer Energy Efficiency Policy – 2016/17

The Department of Energy & Climate Change appointed Dr. Peter Bonfield from the BRE to conduct an independent review into the state of the consumer energy efficiency policy in the UK. According to the terms of reference document, the initial report findings are to be reported back to the relevant Government Secretary of State by the end of Spring 2016 with no set date yet for full published findings and a date set for implementation to the market.

We therefore wait to see whether the Policy Exchange’s findings on UK tax exemptions are to be reported back and included in the full Bonfield review. Including some moderate tax incentives (examples mentioned above) along with other measures (a new and reformed ‘pay-as-you-save’ scheme) would be some steps in the right direction to helping kick off a better take-up of energy efficiency measures.

Think we missed something? Do you have a different opinion?

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