Should Stamp Duty be Linked to the Energy Efficiency of Homes?

The UK property sector is currently involved in the on going debate over stamp duty and whether or not it should be linked to the energy efficiency of homes. Under current legislation no home may be sold without a current Energy Performance Certificate (EPC) and no home priced over £125,000 may be purchased without paying the Stamp Duty Land Tax. Meanwhile, environmental associations are requesting further financial incentives to sustainably retrofit existing, non-carbon neutral homes.

The important question is: how is all of this linked?

The Carbon Plan

Under the Carbon Plan the UK has a target of making all new homes carbon neutral by 2016, but there remains a huge stock of homes which is either aging or energy-inefficient or both, costing us in fast-diminishing fuel resources. While alternative fuels are being sourced, studied and trialled, the UK must look at sustainable retrofit options to bring existing, energy-inefficient properties into line with the 2050 targets for reduction of fuel emissions, set at 80% below the 1990 baseline. Residential property accounts for a quarter of the UK’s fuel emissions, so, to achieve this target, homes must become greener.

The Green Deal

Home improvements cost money. Recognising this and incentivising homeowners to adapt their homes in an environmentally-conscious manner has already begun. In 2013 the Green Deal was introduced, allowing homeowners to apply for private finance to front green retrofit measures in their properties, subject to certain conditions. This ‘pay as you save’ system gives loans to residential homeowners who wish to improve their homes by installing approved technologies and materials to cut fuel and electricity expenditure, thereby reducing emissions. The idea is that the loan is repaid out of the post-installation energy savings, the homeowner owing no more in repayments plus the new energy bill combined than they would have paid for their energy prior to the cost-saving measures being introduced to their property. It’s also important to note that the debt is linked to the property, not the owner, so in the case of the property being sold, the new owner inherits a home with a Green Deal debt. This can have a negative effect on the property’s value.

In summary, the Green Deal has its heart in the right place, but a lack of effective marketing to the consumer, frequent changes to its conditions and high interest rates on the loan have seen a significantly lower uptake than anticipated by the government.

Retrofit Incentives

This is why the UK Green Building Council has proposed that further financial incentives be introduced to further encourage homeowners to go green.

One such incentive is the reduction of stamp duty for energy-efficient homes, based on the property’s EPC rating.

How might energy-linked stamp duty work?

If a property is rated above a certain efficiency level on its EPC, the house buyer would be offered a discount on the stamp duty payable.

If a property is rated below a certain efficiency level, the buyer would have to pay a higher rate of stamp duty.

Should a buyer carry out approved green retrofit measures on an energy-inefficient property within twelve months of the purchase date, they would be eligible for a rebate on the stamp duty paid.

This system creates a tangible link between energy efficiency and property prices, as a house with lower stamp duty would indicate a property where less green retrofit work would be required in the imminent future, thereby costing the buyer less overall and becoming a more attractive purchase proposition. Modern house front garden view

How much would the stamp duty discount be?

As it’s still a proposal, no firm figures or bands have been set, but the stamp duty saving could potentially be a few hundred pounds for a small home with a relatively low level of energy efficiency to many thousands for a large, highly energy-efficient home.

The pros

More homeowners would be encouraged to carry out green retrofit works, thus reducing emissions and improving the energy efficiency of the built environment.

There would be a boost to the construction industry as more retrofit works are carried out and sustainable measures introduced into homes.

The construction industry would benefit from more work, thereby increasing stable employment opportunities within the sector, creating more income and contributing to a rise in the UK’s GDP.

As 80% of the UK’s buildings in 2050 already exist today, and an estimated twenty million properties require retrofit, the commercial opportunities are huge.

And the cons

Even with a reduction in stamp duty and a Green Deal loan, or other incentive to retrofit, there are concerns that many low-income households in low value properties with energy inefficient ratings may struggle to install sufficient measures to adequately raise their EPC.

There are also concerns about the way in which EPCs are assessed. The current system is inaccurate, without the ability to predict, measure or provide real and precise data. In order to link effectively to stamp duty, EPCs need to be based on accurate statistics. Examples of these would include quantifying fuel usage reductions following the introduction of any retrofit measures, along with related financial savings. With the improvement of data collection methods looking likely to improve with time, performance standards, such as the EPC, should, in future, give a much fairer analysis of the energy efficiency of a home. Only then will it be possible to link standards to stamp duty in a valid way.

So, whilst there seems a strong argument to link stamp duty to a property’s energy efficiency, we first need to change how we measure energy use in our buildings, so that any resulting financial incentive is fairly based on accurate data. This will take a great deal of work and time. The details of how such a link might be satisfactorily implemented also require clarification. That said, the pressure being placed on Parliament to address this proposal is strong and looks likely to succeed under the current government. It’s therefore safe to conclude that whether it be a stamp duty discount for an energy-efficient home purchase or some other incentive to up our EPC ratings, we shouldn’t wait for the Bill to be passed before doing what we can to improve our environment today.