EEH0084

Written evidence submitted by NATIONAL RESIDENTIAL LANDLORDS ASSOCIATION

1.0                ABOUT THE NRLA

1.1              The National Residential Landlords Association (NRLA) is the leading voice for private sector residential landlords. It was formed in April following the merger of the Residential Landlords Association (RLA) and National Landlords Association (NLA).

1.2              The NRLA represents the voice of 80,000 landlords, by far the largest organisation in the sector. The membership owns and manages around 10% of private rented housing in England and Wales equating to half a million properties.

1.3              It provides training and support for landlords to ensure they fully understand their responsibilities and are equipped to provide good quality housing for their tenants. It also campaigns for policies that seek to improve the private rented sector for the benefit of tenants and good landlords alike.

1.4              The NRLA would welcome the opportunity to give oral evidence to the Committee to expand on the points below.

1.5               For any questions about our response, please contact Meera Chindooroy, Deputy Director of Campaigns, Public Affairs and Policy, at policy@nrla.org.uk.

2.0                EXECUTIVE SUMMARY

2.1               Over the last 10 years there has been a considerable improvement in the energy performance of private rented housing. That said, there remains a rump of largely older properties which continue to be in the lowest energy efficiency bands.

2.2              Whilst the Government has opted to set targets for how energy efficient rented homes should be, the NRLA believes the Government needs to set a long term goal with incremental targets to a property rather than seeking to meet one-off targets. We should ultimately be aiming to ensure that every private rented property is as energy efficient as possible, rather than simply meeting a short-term minimum threshold.

2.3              This means taking a ‘fabric first’ approach to improvements in properties by maximising the performance of the building and its materials – for example the role of insulation and managing ventilation – before considering interventions such as the installation of energy efficient or renewable technologies.

2.3              Council tax should not be charged on empty properties where landlords are undertaking energy efficiency improvement work that can only be undertaken without a tenant in situ.

2.4              The Government should take advantage of the powers it has as a result of leaving the European Union by no longer charging VAT on material and work to improvement the energy efficiency of properties.

2.5              We propose that any measure a landlord carries out that is recommended on an Energy Performance Certificate should be classed as a tax deductible repair. This would address a clear anomaly which means that where a landlord wants to carry out work to undertake repairs it is tax-deductible whereas energy efficiency improvements are not. As an example, whilst replacing a broken boiler is considered tax deductible, if a landlord wanted to replace an energy inefficient boiler it would not be.

2.6              The NRLA’s proposals would support landlords to undertake continual improvements to a property. This in turn would provide new work for those local SME tradespeople whom individual and small business landlords will often use.

ARE THE GOVERNMENT’S TARGETS ON RESIDENTIAL ENERGY EFFICIENCY STILL APPROPRIATE TO ACHIEVE ITS AMBITION TO REACH NET ZERO EMISSIONS BY 2050?

3.0               BUILDING ON A RECORD OF IMPROVEMENT IN THE RENTED SECTOR

3.1              The NRLA recognises the importance of ensuring energy efficient properties both for tenants’ health, the impact on their finances and the Government’s ambitions for the country to be carbon neutral by 2050. For landlords too, a property that is energy efficient is far more marketable.

3.2              In assessing the energy performance of private rented housing, it is important to place it within a much broader context which shows considerable improvements in the sector.

3.3              The proportion of private rented homes with an Energy Performance Certificate (EPC) rating of F or G has fallen from 19.4% in 2008 to under 5.3% in 2018[1].

3.4              Since 1st April this year, as a result of the Minimum Energy Efficiency Standard (MEES) all private rented homes in England and Wales have been required to have an EPC of E or better unless a landlord has registered a property as being exempt for one of a number of reasons outlined by the Government[2]. What is the government’s long term target? Incremental targets can create a situation where landlords do work which needs to be removed in future years. A no regrets policy builds confidence and support in the works to be undertaken.

3.5              The Government’s data shows that this will require work to be carried out on the majority of private rented homes as outlined in the below table.

Proportion of PRS Housing in England in Each Energy Efficiency Band (2008 and 2018)

Source: English Housing Survey 2018/19[3].

3.6               The NRLA believes that a financial system needs to be put in place to enable landlords to ensure rental properties are as energy efficient as possible.

3.7              There is a conflict at the heart of government policy – energy efficiency is not the same as carbon efficiency. The EPC is not looking at the carbon emissions; it still advocates the installation of gas boilers. Is this going to be government policy going forward? The Government has already confirmed that gas boilers will be banned for new build properties from 2025. But there remains a question mark about existing properties.

3.8               We support a fabric led approach to improvements to property, but to facilitate this, there should be a repository of best practice that landlords can access be able to plan the works required. To move the housing stock to lower energy consumption, especially around heating, best practice needs to be understood along with what the associated costs are. We also have concerns around the skill set to deliver these improvements.

3.9               The long term target needs to be set from which landlords can understand and plan how to reach this. What is the goal is it energy efficiency or carbon reduction? If it is the latter what is the date so that planning can take place.

3.10               There needs to be a financial modelling of housing in the UK and what can be achieved, with some projections of improvements costing between £26,000 and £50,000, this is more than 50 of property values in many cases across the UK. This will make these properties unaffordable to rent out and for people to live in. the need for modelling of costs and how to scale improvements is required.

4.0               FINANCING ENERGY EFFICIENCY IMPROVEMENTS

4.1              The Government’s current model to finance its energy efficiency measures in the rental market is a requirement that landlords should be expected to pay up to £3,500 to ensure that the properties they rent are rated E or better. This has the following problems:

• Whilst landlords clearly have a duty of care to their tenants, under this model it is they who are expected to make the investment, whilst it is the tenant who enjoys the financial benefits through reduced energy bills. Equally if the government moves to a carbon based target and the landlord moves to electric heating this is more expensive for tenants.

• It is developed on a premise that every landlord could afford to pay this. The Government’s figures show that the average gross rental income for private landlords is £15,000[4]. From this landlords need to cover all their costs including taxes, mortgage payments, licensing fees, insurance, service charges where applicable and, in cases of all-inclusive rents, council tax and other utilities. This is all in addition to day to day maintenance. In this context, the Government’s expectation is that an average landlord should be required to spend almost a quarter of their entire rental income on making energy efficiency improvements.

• The financial pressures faced by landlords are being exacerbated by the COVID-19 pandemic with many unable to repossess properties where tenants are not paying their rent which, is some cases, have been building before the lockdown began. 29% of landlords have told us that they expect to face some level of financial hardship as a result of the virus[5].

4.2              Further problems include:

• The Energy Company Obligation (ECO) is not working as it should in private rental market. Under the scheme it is the tenant that is expected to secure the funding and if they are not planning to reside in a property long term, they are unlikely to see much by way of benefit to themselves. It is little wonder that the Government’s figures show that of all households in receipt of ECO funding since the start of 2013, just 14.4% have been in the private rented sector[6].

• Since the Landlords’ Energy Savings Allowance ended in 2015 there have been no tax measures to pro-actively support landlords making investments in energy efficiency improvements. A clear example is that of boilers. If a landlord wanted to replace a boiler for a model that is more energy efficient it would not be tax deductible. However, if a boiler were to break down and be replaced, it would be tax deductible, as it would be classified as a repair.

4.3              If the Government is to meet its increasingly ambitious targets for improvements in the private rented sector it is vital that tax reforms are made to support landlords to make the energy efficiency improvements that are needed.

4.4              Whilst we are mindful of the difficult fiscal position the Government now faces in light of the COVID-19 pandemic, supporting investment by landlords in energy improvements would provide a welcome boost to the economy, both locally and nationally.

4.5              Earlier this year, Aldermore Bank published figures suggesting that landlords inject £3.61 billion annually into local economies across the UK[7], with spending focussed largely on the use of local trades people when work is required on a property.

4.6               The Energy Efficiency Infrastructure Group has identified the following advantages of supporting energy efficiency work in properties, of which the private rented sector could play a major role[8]:

• ‘Levelling up’ infrastructure and opportunities across the UK - supporting over 150,000 skilled and semi-skilled jobs to 2030, reducing household energy expenditure by £7.5 billion per year. It argues that this would do more in regions most affected by unemployment, under-investment and fuel poverty.

• Delivering a net benefit to the economy and the public purse. The Group notes that: “Germany’s federal energy efficiency programme has succeeded in leveraging €6 of private energy efficiency investment for every €1 of public money spent on the programme, recouping its outlay through VAT receipts alone.”

• A quick and reliable economic stimulus by linking energy efficiency work “to shovel-ready projects, delivery mechanisms and supply chains already in place under existing schemes for homes and public buildings across the UK.”

4.7              In light of the above, we are calling for a number of measures to stimulate and support landlords to make the investment in energy efficiency work that will be needed in order to meet the Government’s ambitious targets.

4.8               Council tax should not be charged where landlords are undertaking work to improve the energy efficiency of properties. For many landlords, improving the energy efficiency of properties is best achieved by undertaking as much work as possible in one go. Often this will require the property to be empty. However, under the current system, as soon as the property becomes vacant they become liable for the council tax. It clearly works against the Government’s energy efficiency objectives to have a system which penalises landlords seeking to make positive use of periods when properties are empty in this way.

4.9              As a result of the UK leaving the European Union, the Treasury should scrap the application of VAT on products and services related to household energy efficiency improvements. Energy UK has previously supported such a call, noting that it would have “the potential to provide greater incentive for households to invest in upgrading their properties”, helping, in the process, “to create a market for energy efficiency.”

4.10              More fundamentally however, there needs to be a tax incentive scheme to replace the Landlord Energy Savings Allowance. Whilst we accept that this was originally scrapped because of low take up, this was at a time when there were no energy efficiency standards that landlords were legally required to meet. The introduction of this ‘carrot’ would provide much greater incentive for landlords to make improvements to properties as early on in the ongoing process of making improvements as possible.

4.11              Our calls for some sort of scheme have been supported by others in the energy saving industry. These include[9]:

• Philip Sellwood (then Chief Executive of the Energy Saving Trust): “There is no reason why we could not use the tax system to incentivise landlords through tax relief, so that they could claim all of that, rather than just £3,500, £5,000 or whatever.”

• Lawrence Slade (then Chief Executive of Energy UK) supported the re-introduction of the Landlord Energy Savings Allowance (LESA) arguing that: “This would be a perfect example of carrot and stick: “Yes, you have to invest in the properties you own, but actually there is a tax-saving opportunity for you there.”  The Government have missed a trick in not looking at that again.”

• Shirley Rodrigues (Deputy Mayor for Environment and Energy at the Greater London Authority): “We think incentives and tax allowances would really help to get landlords taking this up and addressing this really big problem.”

4.12              The Energy Efficiency Infrastructure Group has argued for the reinstatement of LESA “to reward private sector landlords who renovate their homes beyond what the current MEES requirements.”[10]

4.13              The NRLA proposes that any work that a landlord carries out to a rental property that is recommended on an EPC should be tax deductible, with landlords able to choose whether to deduct against income tax or capital gains tax. This would have the benefit of:

• Encouraging landlords to behave in a way that they would otherwise not have done. Previous Research by the Residential Landlords Association found that among the 42% of landlords who indicated that they were not currently planning to make any investment in energy efficiency measures over the next 12-24 months, almost 72% said that a tax scheme to support such work would make a difference to their decision[11].

• Being self-policing as the recommendations are legally required to be listed on the EPC and are made by a qualified energy performance assessor. They also have a directly measurable cost-benefit as each recommendation must come with an estimate of its cost and the expected annual monetary saving it will create.

• Incentivising improvements over the long term rather than being a ‘one-off’ as a landlord can get a new EPC having improved the property and carry out a further set of improvements to increase efficiency permitting a further tax deduction. It would support improvements beyond landlords simply reaching the minimum E standard and then stopping.

4.14              In order to manage the relief effectively, we propose matching the level of eligible expenditure to the MEES cost cap, currently £3,500, enabling landlords to claim tax relief on up to £3,500 of expenditure per property, per year. The Committee on Climate Change found last year that the average landlord will need to pay £26,300 over the next 30 years to bring their properties up to carbon neutral status (an A rating), and meet the Government’s target of net zero carbon by 2050.[12] Landlords should therefore be able to rollover tax relief between years in order to undertake more substantial works.

July 2020

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