How are the EPC changes going to impact landlords

How much of an impact will this new legislation have?

Currently, 60% of all properties in the UK have an EPC rating of D or below. Plenty of properties which are rented out will be modern, purpose built flats so should have a higher EPC rating, but there are a lot of older properties being rented out and these are the ones that will be caught by the rules.

Do all buildings need an EPC?

No, not all rented out buildings require an EPC, the following are excluded from requiring one:

• places of worship
• temporary buildings that will be used for less than 2 years
• stand-alone buildings with total useful floor space of less than 50 square metres
• industrial sites, workshops and non-residential agricultural buildings that do not use a lot of energy
• some buildings that are due to be demolished
• holiday accommodation that’s rented out for less than 4 months a year or is let under a licence to occupy
• listed buildings – you should get advice from your local authority conservation officer if the work would alter the building’s character
• residential buildings intended to be used less than 4 months a year

This means that as usual, private landlords are going to be the ones mainly affected by these new regulations.

How can I improve a property’s EPC rating?

There are various steps that can be taken to improve a property’s EPC rating. Some small, lower cost measures include:

• Installing low-energy use light bulbs
• Draft proofing windows and doors
• Insulation of pipes and tanks
• Reducing level of water used by the property

If the energy efficiency is very low, larger, more expensive measures may be required, such as:

• Installation of cavity wall
• Loft insulation
• Installing a condensing boiler
• Upgrading to energy efficient glazing
• Investing in renewable energy, such as wood fueled heater or solar panels

The cost of these upgrades isn’t the only thing that needs to be considered as it’s also possible that there could be an impact on mortgage eligibility because of certain renewable technologies.

It’s important that you discuss these with a finance broker if you have a mortgage on the property before you undertake any significant works.

What are the lending implications?

Many buy to let properties have mortgages on them and there can be some very competitive rates in the market place. We’re currently already seeing some lenders only accepting properties with ABC rated properties (generally high street lenders) and there are special lower rates available (green deals) for AB rated properties.

If you have a D or E rated property, you may need to look at specialist lending moving forwards and in particular, look at any mortgages which fall due for renewal after 2025 as you may not have access to as wide a portfolio of lenders as you would have done before.

If you have an F or G rated property, you aren’t legally allowed to rent these out so you wouldn’t be able to get buy to let lending on these properties anyway.

How much is a landlord expected to spend on the required improvements?

The Government does recognise that there will be some properties that will require significant investment to ensure that they meet the new regulations. There have been suggestions of a “high cost” cap which is the maximum amount a landlord will be expected to pay in order to improve the energy efficiency rating of a property.

There are various suggestions of how much this should be. Initial government guidance suggested that this should be £10,000. The current proposals refer to £3,500.

The “high cost” cap sets a ceiling on how much a landlord should have to pay and allows for the property to be let, with a lower rating, as long as it can be demonstrated that the cost of further measures would exceed the cap.

How can I access the “high cost” cap?

You can register for this exemption if no improvements can be made to the property’s energy rating because the cost of installing even the cheapest recommended measure would exceed £3,500 (including VAT).

This exemption lasts 5 years. After that it will expire, and you must try again to improve the property’s EPC rating to C. If it is still not possible, you may register a further exemption.

To register for this exemption, you need to provide additional information:

• 3 quotes from qualified installers for purchasing and installing the cheapest recommended measure, demonstrating that the cost would exceed £3,500 (including VAT)
• written confirmation that you are satisfied that the measure exceeds £3,500 (including VAT)

You can register for an exemption by clicking here.

Are these costs tax deductible?

If the costs you are suffering are for replacing or repairing what’s already there at the property rather than significant upgrades to the building, these should be tax deductible in the tax year in which you incur them.

If you have to make larger changes, such as a full overhaul of the heating system and this results in substantial changes to the building, this could be a capital cost instead and although you won’t get a tax deduction in the year that you incur the costs, you will be able to claim the tax relief when you come to sell the building at a later point.

As always, you should ensure that you keep a record of the expenditure for your records.

What happens if I’d rather sell my property and not deal with this additional regulation?

If you’d like to get out of your buy to let investments and sell the properties, the gains will be subject to Capital Gains Tax and depending on whether you are a higher rate tax payer, you will pay tax at either 18% or 28% on the disposal (as it’s is a residential property being disposed of), after taking into account your annual capital gains exemption and the associated costs of the property.

If you have any questions or you’d like to run through the tax implications of selling your residential properties, please do give one of our advisers a call.