An EPC can only be obtained from an accredited domestic energy assessor, although, where a buy-to-let property is let through a letting agency, the letting agency may organise this on the landlord’s behalf. Certificates, which are valid for ten years, generally cost in the region of £50 to £100.
From a tax perspective, the cost of the certificate is deductible in computing the profits of the property income business, on the basis that the expense is incurred wholly and exclusively for the purposes of the business. The landlord may also be able to take advantage of tax breaks if he is wishing to take on board some of the energy saving recommendations and make the property more energy-efficient.
Landlord’s Energy Saving Allowance
A specific deduction, known as the Landlord’s Energy Saving Allowance (LESA) is available for certain energy saving expenditure. This is useful as it allows the landlord to receive a deduction against profits for items that are capital in nature. Furthermore, it provides relief for what in many cases is improvement expenditure (rather than expenditure on plant and machinery), and as such would not otherwise qualify for capital allowances.
For the deduction to be available, certain conditions must be met. The person claiming the relief must be carrying on a property business which consists of, or includes, a dwelling house.
The expenditure must relate to the acquisition or installation of qualifying energy saving items, either in a dwelling house or in a building containing a dwelling house. However, if the energy-saving item is installed in a building containing the let property, relief is only available if expenditure is incurred for the benefit of the let property. In addition, the expenditure must be incurred before 15 April 2015.
The relief applies only in respect of expenditure that is incurred wholly and exclusively for the purposes of the business and, in respect of which, a deduction is denied only by virtue of the item being capital in nature. To prevent double relief for the same expenditure, where LESA is claimed, the landlord is prohibited from claiming capital allowances in respect of that expenditure.
The relief is only available in respect of energy-saving expenditure on the following items:
cavity wall insulation;
loft insulation;
hot water insulation;
draught proofing;
solid wall insulation; and
floor insulation.
Other types of expenditure designed to improve the energy efficiency of the property do not qualify for relief under the ESA scheme, even if the expenditure relates to an improvement recommended by the landlord’s energy performance certificate.
The allowance is limited to a maximum of £1,500 per dwelling-house. This limit applies regardless of the number of people who own the property or who incur expenditure on energy-saving items in relation to it.
The relief is denied if the expenditure is incurred in the course of construction of the house, or if the house is on land in which the person incurring the expenditure does not have an interest. However, if the expenditure is incurred after the property is constructed but before it is let, relief is available providing that the person starts to carry on the property income business within six months from the date on which the expenditure was incurred.
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The allowance is designed to encourage landlords to invest in energy-saving items to improve the efficiency of let residential property. Consequently, the relief is not available if the business either consists of, or includes, the commercial letting of furnished holiday accommodation and the property in respect of which the expenditure has been incurred has been let as furnished holiday accommodation for all or part of that year.
In the event that a room, or rooms, are let, which would qualify for relief under the rent-a-room scheme, and the rent is instead taken into account in calculating the profits of the property business, the LESA scheme does not apply.
Example
David owns three residential properties which he lets out. He acquires an Energy Performance Certificate in respect of each property. The certificate makes various recommendations on measures that David could take to improve the energy efficiency of each. As a result, David incurs the following expenditure:
Type of expenditure
Property 1
Property 2
Property 3
Cavity wall insulation
£400
Hot water insulation
£50
£75
Double glazing
£2,000
Solid wall insulation
£600
Draught proofing
£200
In respect of property 1, David can claim the LESA of £400 in respect of the cavity wall insulation.
As regards property 2, a deduction is only available for the cost of the hot water insulation as the double glazing is not a qualifying energy saving item. As this is not plant or machinery either it does not qualify for capital allowances.
It represents improvement expenditure of a capital nature, relief for which will effectively be given against any capital gains tax liability that may arise on the sale of the house.
Relief is available under the LESA of £875 in respect of property 3 as the expenditure all relates to qualifying expenditure.
The expenditure on energy saving items is not restricted as David has not spent more than £1500 per property.
If David had incurred expenditure which related partly to qualifying energy saving items and partly to other items, relief would be available to the extent that the expenditure applies to energy saving items. In this situation, the cost is apportioned on a just reasonable basis.
Final Thoughts
The need to obtain an energy performance certificate may focus landlords’ minds on making their properties more energy efficient. Where costs are incurred on energy saving items that qualify for the LESA, the landlord can obtain tax relief for those costs in the tax year in which they were incurred.
Various grants are available for expenditure on energy-saving items and landlords considering making improvements of this nature may wish to first explore the availability of such grants. Whilst a tax deduction is certainly worthwhile, a grant is arguably better.
Sarah Bradford
