An energy efficient property tax?

Can you imagine selling your home for a price that is dependent on how energy efficient it is?

Vicky Ingram
Vicky Ingram

That is a possible future in store for Scotland under the new Land and Building Transaction Tax (LBTT), being discussed this Wednesday (5th June, 2013) at the Scottish Parliament’s Finance Committee. The LBTT will come in April 2015, replacing the current system of Stamp Duty Land Tax (SDLT).

What is Stamp Duty?

The SDLT applies when there is a sale of land or property, and the tax is calculated as a percentage of the value of the property. The percentage depends on bands set out by HMRC. For example, the sale of a property worth £260,000 would incur a tax to the buyers of 3%, or £7,800.

What is the LBTT?

The LBTT will also be dependent on the value of the property, but will not work on the flat system as used by the SDLT. It will instead use a progressive system that includes all bands, and the proportion of value above each threshold will be liable to each rate.

There are two scenarios of banding so far (from the explanatory notes):

Scenario 1
Not more than £180,000 0%
Between £180,000 and £1.5m 7.5%
Over £1.5m 10%
i.e. a house sold for £260,000 has an LBTT liability of 7.5% of £80,000 (the amount over the £180,000 nil banding), a tax to the buyer of £6,000.

Scenario 2
Not more than £125,000 0%
Between £125,000 and £250,000 2%
Over £250,000 9.5%
i.e. a house sold for £260,000 has an LBTT liability of 2% of £125,000 plus 9.5% of £10,000, a tax to the buyer of £3,450.

However, last week MSP Malcolm Chisholm indicated he would like to add a Scenario 3 (BBC news, 29 May 2013). This new scenario would use bands that relied on EPC data, rather than the value of the property. This scenario is strikingly similar to a proposal in a research paper given at the 2013 World Sustainable Energy Days conference in Austria, by Darryl Croft. He suggested in his presentation that to encourage energy efficiency in homes the SDLT should be based on their EPC rating: an “Energy Efficient Stamp Duty”.

“Zero Carbon” homes are already exempt from paying SDLT. Under Croft’s system, the SDLT would be increased or decreased depending on the EPC. For example, a poorly performing G-rated property would cost 1.5% more than the current SDLT while an A-rated property would cost 1.5% less. With the bands in his paper, Croft calculates that for 44% of households the reduction in SDLT would exceed the costs required to move up one band on the EPC.

I have some concerns with basing either SDLT or the LBTT on EPC ratings. The latest figures from the Scottish House Condition Survey suggest that (a not insignificant) 33% of Scotland’s dwellings are below average for EPC ‘SAP’ ratings, with 20% achieving lower than an E-rating. But how are these values calculated?

It has long been acknowledged by researchers and the Government alike that the energy model used to calculate EPC ratings has flaws. The model is typically updated every couple of years, but is still far from being capable of reflecting true energy usage in a dwelling. The latest update in October 2012 was designed to ensure greater accuracy for the Green Deal. There is however still a very important difference between the methodology for an EPC rating and a Green Deal assessment: the location of your house.


Under the current methodology – Reduced data Standard Assessment Procedure (RdSAP, v9.91) – any calculations made for the Green Deal are made using weather data (such as temperature) on a regional basis, using this map:
However, calculations made for the EPC are done using “UK average climate data”. To add insult to injury, this is not actually a UK average; it is simply the weather information as for ‘Region 11’. So for an EPC, the model assumes that all regions have the climate of Sheffield. Put another way, the model assumes that Peterhead and Portsmouth have the same temperature. This is just one parameter within RdSAP that highlights the caution needed, and policy makers should ALWAYS remember that RdSAP is a compliance tool, and should NOT be used as an advice tool without significant improvement in the calculation and the understanding of the assessors.

Scotland’s challenges
There are many challenges facing Scotland’s built environment through increased regulation with respect to energy efficiency, carbon and energy used. Any introduction of regulation should be made after careful and thorough consideration of the impacts of such legislation. I believe that if an energy efficient LBTT is introduced, it will lead to lower house prices, because buyers may demand energy improvement measures before buying that the current owners cannot afford to implement. The buyers will pay a lower price to cover the higher LBTT, and improvements still won’t have been made as buyers are under no obligation to improve the house themselves.

This system could work if combined with an extended version of the requirement that homes achieve at least an E rating when they are leased (due to be in force by 2018) – by making this requirement extend to cover sales. This would require the improvements are made before the house is sold. The value of the improvements could be added to the value of the property so the homeowner doesn’t lose out (although still has to find the capital in the first place), the buyer gets an efficient house and a smaller property tax, and emissions are reduced, which is after all, the goal.

By Vicky Ingram

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