Tax Reform needed to Improve Private Renting Energy Efficiency

by | Aug 8, 2018 | Blog post, Environment, Safety & Standards, Finance & Taxation Reform

Our latest research has found that landlords with F or G rated properties are struggling to afford to bring their property up to at least an E rating. We argue that tax reform would improve property conditions by allowing improvements to be tax deductible against income tax, rather than Capital Gains Tax. 

The PRS has grown significantly in size over the last twenty years and now provides a home to 4.7 million households (MHCLG, 2018). The sector is developing and becoming more diverse, with more families, low-income households, over-65’s and the most vulnerable finding a home from a private residential landlord. Due to this growth, the sector is coming under growing scrutiny. One core area of policy focus has been on the standards and energy efficiency of privately rented homes, which has led to the introduction of Minimum Energy Efficiency Standards.

From 1st April 2018, all properties in the sector are required to have an Energy Performance Certificate (EPC) rating of an E or better for new or renewed tenancies, with the rules applying to all rental properties by 2020. There are further plans for minimum EPC ratings of at least a C rating by 2030 in a bid to rapidly improve standards in the sector.

Our latest quarterly survey report focussed predominately on the impact of the introduction of these minimum standards and if there were any policy changes that could help landlords to reach higher standards. While we found that the majority of landlords have been unaffected by the new regulations, of those landlords with an F or G rated property over 1-in-3 reported they could not afford to bring it up to at least an E rating. On average, landlords reported that it would cost them £5,789.76 to do so. To mitigate the cost of these works, 20% of landlords reported they would have to sell the property, and 51% said they would have to increase the rents they charge.

However, the current tax system does not incentivise a culture of continuous improvement in the private rented sector; instead, landlords have to wait until they sell the property (if they remember to save all the receipts – sometimes for over 10-15 years) before they can claim any tax relief. There is a simple policy change that the Treasury could introduce in the next budget that would change all of this.

Based on our findings, we recommend that specified improvements for energy efficiency work as being tax deductible against rental income rather than capital gains tax (CGT). Our previous research has found that 61% of landlords would be encouraged to improve the energy efficiency of their properties if there was tax relief to do so.  We believe that this policy would support all landlords to make ambitious energy efficiency improvements beyond the Government’s minimum requirements.

It is not just ourselves that are calling for this policy change; this was featured in a joint-report between the Chartered Institute of Housing (CIH) and the Resolution Foundation. Separately, in a report for the JRF by academics at the University of Cambridge this policy measure was one of three that were costed and demonstrated the potential to improve housing quality right across the sector. Showing that there is broad cross-sector appeal for this policy change.

At the same time, research from IPPR has found that the Government is likely to fail to reach its Fuel Poverty Strategy target of bringing fuel-poor homes to at least a C by 2030 and will not meet the aim until 2091. Also, the Committee on Climate Change’s (CCC) annual report found that the UK is on track to miss its legally binding future carbon budgets, due to the lack of progress in cutting emissions from buildings. If the UK housing stock is to become more energy efficient quickly, there is a clear need for change.

The Government has recently consulted on introducing a cap on energy efficiency works, however, the current proposals could go a lot further to encourage and support private landlords to reach their full potential in the homes they provide. This simple change to when tax relief is provided could be the impetus to encourage a new drive in improving properties, with the potential to help lift vulnerable tenants out of fuel poverty and support wider economic growth in rerenewable nergy technologies.