EPC policy…the road to tenant hell?

EPC policy…the road to tenant hell?

by Readers Question

Guest Author

14:25 PM, 1st December 2022, About 2 years ago 26

Text Size

The road to hell is paved with good intentions. Like being obliged to have an EPC to rent a property.

So, I’m a landlord and a homeowner. I have in the distant past been a tenant. When I buy a home, I get a full survey to tell me about the structure of it, whether it’s worth the money, what problems there might be. In theory a survey telling me something about energy use isn’t a bad idea. But energy use isn’t the only factor. Energy security is another. If the electricity goes off, can I still heat it? Does it have photovoltaics or a solid fuel stove? And can I still boil a kettle so is there a gas hob? As the occupier, do I have some choice over energy use?

Having a report available online before I decide to go and view the property may save me a bit of time. In reality, I will find out from the surveyor before I purchase but it’s nice to know a bit more about the property before I fork out £500-1000; as a tenant having better information on the property might help me make a good decision. But only if it’s good information and only if I have choice.

In practice, as a landlord the last time I had to do an EPC I read the report and knowing the property well I thought “…that’s b******s.” The EPC report was relying on assumptions that were wrong; some of the recommendations would damage the property but there were other things that could be done that would be more useful in energy performance terms either to me as an owner-occupier or to a tenant that weren’t mentioned at all in the EPC. The tenants never commented on the EPC anyway and I doubt they would have understood it even if they’d read it. Having an EPC allowed me to rent the property so having an argument with the EPC assessor over the report was pointless; the EPC was just ticking a box and having ticked that box and supplied an EPC to the tenant to be legally compliant we all ignored the EPC for the worthless piece of paper that it was. We just focused on important things, like servicing the gas boiler, ensuring the property was safe for the tenants.

Whether it’s driven by concerns over climate change or concerns for tenants’ energy bills there are some proposals out there suggesting that at some point in the future a landlord might not be able to rent a property if it doesn’t meet EPC band C. Most properties are at EPC band D. As a landlord, the main reason I’m on Property 118 is to learn more, stay ahead, be able to plan for the future. The best bit of information I’ve been able to find about the EPC system via a Google search is this one.

But this document tells me that the EPC system is a Black Box. It relies on you putting information into some kind of computer system which then throws out garbage that you ignore because it’s not useful. As a landlord I’m trying to plan. What should I do if anything? What is it going to cost me?

When it comes to cost one of the key things I’m interested in is not just what improvements am I likely to be obliged to make to move from Band D to C: It is also, will these improvements all be treated as capital expenditure (that I have to finance from further borrowings) or revenue expenditure that I can deduct from rents and carry losses forward to future years in the normal way. I can’t find the answer to that question.

On the basis of the only information I can find, it’s likely that if I am obliged to meet Band C I am going to have to remove the tenants to do it. It also looks as though I can’t deduct all of the expenditure so that means when I put tenants back in (*if* I put tenants back in) then that will be at a much higher rent. There will be an extended void period so the tenants will have to find accommodation elsewhere and if lots of landlords decide not to rent anymore that will help to drive rents up. Tenants will be faced with higher rents so they will probably not benefit from better EPCs. They will just trade a vague promise of lower energy bills for the certainty of higher rents. And that’s even before you consider their energy security.

How much better would it be if there was no obligation to move to band C but you had an EPC system that actually worked? If tenants had a choice that effectively said, “…you can rent this property if you want to but you may have higher energy bills.” Of course, that system does rely on having an EPC system that works and a black box that does not spit out garbage that is not useful.

If tenants had such a system…a system where they could continue to rent even below Band E but they had useful information on energy bills…then tenants would have greater choice. Anything that reduces tenant choice and reduces supply is going to drive rents up. Not having costs of improvements tax deductible, including the financing costs, is also going to drive rents up just as rents are being driven up by higher finance costs now.

So, does anybody on Property 118 know what the tax treatment of all the costs required to finance EPC improvements to move from Band C to D is going to be?

If so, can you please enlighten me and everybody else.

Beaver


Share This Article


Comments

Andrew Martin Harrington

10:51 AM, 2nd December 2022, About 2 years ago

Dear Beaver
I have read your comments on EPC's.
The whole reason the EPC reports are there is to allow the Government to log and monitor the UK and Ireland Housing stock and to have the Energy data for the Kiyoto agreement- which you acknowledge in your comments - with the average EPC rating being a D.
I am a Domestic and Commercial property Energy Assessor and have completed thousands of EPC reports.
I think the main issue is that people see them as another unnecessary cost in the letting and Buying / selling process. But without EPC reports people would be still living in badly maintained - cold and very costly to live properties.
I live in North Northumberland - To give an example. We have a lot of old Sandstone rural properties which are hard to heat and to treat to make more energy efficient. Unless you have been to the moon in the last 2 years - the cost of energy has gone off the map. So without and EPC there is no way of finding out the Energy rating of a property and make recommendations to make things better. Estate agent used to say - Here is the EPC - no one reads them - thing have changed- You cannot rent out a property unless its is rated E or better and is increasing to C as you have pointed out. Some Mortgage lenders will not lend on Buy To Let properties if no E or better. Remember - if the EPC runs out on a rental property while occupied and the tenants are asked to leave- You cannot serve a notice for your property without a valid EPC for that property- So if they Tenants decide to not give access to you or the Energy assessor- You are a bit stuck.
So love then or hate them - they are here to stay and will be used for even more in the future to get property more Energy efficient.

AnthonyG

10:56 AM, 2nd December 2022, About 2 years ago

Hello Beaver

On the face of it, energy improvement does seem to be a capital expenditure item as you say. I think I read somewhere that if the legislation eventually goes through for the EPC change (Minimum Energy Performance of Buildings (No. 2) Bill) then energy improvements are to be treated as revenue.
Having said that, here seem to be plenty of energy saving changes that are replacements rather than revenue; for example changing old light bulbs for LED, replacing an old boiler for a better rated one, replacing dilapidated loft insulation, making sure replacement underlay has decent energy performance, replacing old windows with new, as new ones have much better thermal performance. Don’t quote me, but I believe moving from single to double glazing is revenue rather than capital.
I wouldn’t expect to move tenants out during energy improvements, any more than I would move out of my own house during improvements, but perhaps you have something very major in mind.

Jo Westlake

11:10 AM, 2nd December 2022, About 2 years ago

Brilliant comments especially about tenants should have the choice.

The capital expenditure or revenue expenditure is a major problem.
An example of just how nuts that is is if I include electricity in the rent in an HMO it's a deductible revenue expense. If I buy solar panels to improve the EPC and to generate electricity for the house it's a capital expense. If I export the electricity to a utility company I get paid for it. It seems that if I use it in my HMO I can't claim anything for the cost of generating it. If a commercial building has solar panels installed there are tax breaks but apparently not on residential buildings used for BTL.
With the whole CGT and IHT situation I don't intend to ever sell the house so will never benefit from the capital expenditure allowance.

DAMIEN RAFFERTY

12:16 PM, 2nd December 2022, About 2 years ago

It takes time to replace an old boiler with a new system !
Combi gas boilers will be banned soon.
Air source /Ground source heat pumps require a big investment and requires the floors coming up to fit the underfloor pipes or cables.
Not really possible with either tenants or home owners in the property.
To rewire a property is also a large undertaking and makes a mess of most walls and flooring and would cause huge disturbance to anyone living in the property.

Dr Rosalind Beck

13:33 PM, 2nd December 2022, About 2 years ago

Reply to the comment left by Martin Harrington at 02/12/2022 - 10:51
I believe the following statement is incorrect. Happy to be proven wrong. It is my understanding that a new EPC is not needed for tenants in situ, even if they are given their notice.

'Remember - if the EPC runs out on a rental property while occupied and the tenants are asked to leave- You cannot serve a notice for your property without a valid EPC for that property- So if they Tenants decide to not give access to you or the Energy assessor- You are a bit stuck.'

geester24

13:33 PM, 2nd December 2022, About 2 years ago

Of course the elephant in the room is if this is all for energy efficiency and Kyoto then why is the PRS (20% of total housing stock) being obliged to do this when non PRS is not. If you really want to make a difference then rolling out the new C EPC grade to owner occupiers would have 5 times the effect. Oh I know, because that would lose votes.

Claire Smith

13:52 PM, 2nd December 2022, About 2 years ago

Reply to the comment left by Martin Harrington at 02/12/2022 - 10:51
The problem with EPC reports is the number of assumptions made. I found that 1 house on a road where we have a rental had a grade C. When I checked the report, it assumed cavity wall insulation when all the houses have solid walls.
Looking at our report for that particular house, the only practical way to get a level C will be solar panels. Interestingly I have seen several reports which suggest these for houses without a roof facing in a suitable direction.
It's good that some surveyors will now go around a property to advise on how to increase the EPC - this is of practical use.
I am all in favour of improvements, but there needs to be an acknowledgement that the costs for some properties (typically old terraced stone houses) is uneconomic.

13:56 PM, 2nd December 2022, About 2 years ago

I don't know if EPCs have been updated but when we built our economy house in 2010, which was submitted by Rother District Council as their entry for the SE building awards, the EPC assessment couldn't cope with the advanced technology. The box ticking forms simply didn't work. Eventually he gave up and gave it an A+ rating. It seemed a pointless exercise.

Graham Bowcock

15:17 PM, 2nd December 2022, About 2 years ago

As a landlord, agent and property valuer I have often felt that EPCs were of limited value, but in recent years that position has definitely changed.

With the costs of fuel ever rising, tenants are now very concerend about EPCs and efficiency. My own mother rents a farmhouse on a rural estate and we have had battles with the owners to improve the efficiency. The house still has a G band, but some works have been done to secure the exemption. Quite frankly it's not enough.

Banks are now looking closely at EPCs as part of their own carbon footprint; properties with very low EPCs will become unmortgageable, or subject to loaded mortgage costs.

Andrew Martin Harrington

15:51 PM, 2nd December 2022, About 2 years ago

Reply to the comment left by Graham Bowcock at 02/12/2022 - 15:17
The property should not have a Tenancy agreement- as all rental property should be E rated or above -that includes existing tenants and agreements.

1 2 3

Leave Comments

In order to post comments you will need to Sign In or Sign Up for a FREE Membership

or

Don't have an account? Sign Up

Landlord Tax Planning Book Now