VAT: Residential properties & UK’s net zero target – tax savings for landlords

The main source of emissions in this sector are from the use of natural gas in homes for heating and cooking.

The increase to the minimum energy efficiency standard for residential properties let by landlords was meant to result in the reduction of emissions from the residential sector. But in September 2023 the Conservative Government announced the scrapping of this requirement. However, given the Labour Party Manifesto included a commitment to improving the energy rating of homes owned by private landlords, this is only likely to be a temporary reprieve for landlords.

While affordability has often been cited as one of the main obstacles to landlords upgrading their properties and improving energy efficiency, there are several benefits which should make it a worthwhile undertaking. In general, the reduction to household energy bills is a selling point which should improve the letting potential of properties, especially in more challenging areas e.g. outside the South East of England.

From a VAT standpoint, the temporary zero rating for the installation of Energy-Saving Materials to residential accommodation helps to make upgrades more affordable for landlords. It is possible for the relief to be extended to the purchase of Energy-Saving Materials (i.e. where the landlord employs a business to supply and install those materials) which, depending on the project, could result in total savings of around 20%.

Energy-Saving Materials covered by the relief include:

• insulation materials
• draught stripping materials
• central heating and hot water system controls
• solar panels
• ground source heat pumps
• air source heat pumps
• micro combined heat and power units
•  wind turbines and water turbines
• water source heat pumps
•  batteries for storing energy converted from electricity
• Smart diverters

Care needs to be taken when entering into contracts to ensure the VAT relief can be applied by the supplier to the works, as where substantial works are being undertaken the saving could be significant.

It is worth noting that the installation of Energy-Saving Materials when carried out as part of a large refurbishment project is normally seen by HMRC as a single supply with a unitary VAT treatment, typically standard rated. So, for larger projects, consideration should be given to carrying the Energy-Saving Materials works out under a separate contract. This is another matter which should be discussed with the suppliers before starting work.

This relief expires on 31 March 2027 after which point the VAT rate will revert to 5%. It will be interesting to see if the new Government removes this deadline, especially if they intend to reinstate the Energy Performance Certificate step up for rented homes, and if they are considering removing the affordability cap on expenditure. If landlords are to be forced to undertake works, the elimination of VAT on the costs would be a reasonable expectation.

Would you like to know more?

If you would like to discuss any of the above, please speak to your usual Blick Rothenberg contact or Ola Adigun using the form below.