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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.

map

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

7 Comments Post a comment
  1. Vicky,

    The purpose of the Green Deal is to allow property owners to attach the capital cost of energy efficiency improvements to the electricity meter in the property. Repayment of the finance therefore is transferred to the new owner on completion of a sale. In this was the Green Deal policy can support the introduction of a LBTT based on energy efficiency. How a green deal repayment attached to the property affects the marketability of a property remains to be seen and also there is a risk that outstanding Green Deal finance could be subject to early redemption as part of the property conveyance.

    I’m not sure I understand the point that you are trying to make with regards to the SAP score. Yes you are correct, the SAP rating and therefore the banding is based on region 11, however since 9.91 the RdSAP calculation is sensitive to climatic variation, from “Table S20 : External temperature by month and region” in Appendix S of the RdSAP methodology version 9.91. This is distributed across 21 regions of the UK of which there are 9 relevant for Scotland. Table 20 is used to estimate the space heating load for the property and this kWh value is then used as part of the calculation for energy cost and carbon dioxide emissions.

    This means that the location of the property should not be a factor in the rating itself that is to say the “energy efficiency” of the property is not any less just because you are 400 miles more north. This would mean that any policy based upon energy efficiency would not adversely affect properties because of their location making any duty required for house sales more onerous in the north than the south for a property with the same level of energy efficiency. I would have expected that this would be an equitable outcome of any LBTT policy?

    RdSAP doesn’t however vary the rating, carbon dioxide emission or cost calculations based on site exposure, i.e. that an average wind speed is used in the calculation. If you look at Table U2: Wind speed (m/s) for calculation of infiltration rate contained within the new SAP 2012 version 9.92 (May 2013) http://www.bre.co.uk/sap2012/page.jsp?id=2759 you will see quite a variance between the “UK Average” and regions in Scotland, particularly in regions 18, 19 and 20.

    Regards,

    Scott.

    June 6, 2013
  2. Hi Scott,
    Thanks so much for the response, really appreciate it, and great to see someone read the post!

    A comment on your first topic, the Green Deal. I purposefully didn’t mention the Green Deal much in this post – it warrants a whole host of blogs just by itself! I will admit – I am not a fan of the Green Deal. The interest rates are too high,it’s too easy for people to be scammed (currently being seen across the country unfortunately), and it uses RdSAP. Most people if serious about wanting to improve their home will get loans through other means with lower interest rates. If the Green Deal was successful, I do agree it could benefit hugely if property taxes were based on energy efficiency, but I fear it won’t be a success.

    But before this turns into a whole new blog let’s move on!

    I disagree if you don’t mind on your understanding of the climate regions. SAP 9.91 states that “For ratings (SAP and EI ratings), the calculations are done using the UK average climate data” and SAP 9.92 (draft edition) states that “Calculations of space heating for fabric energy efficiency (FEE), regulation compliance (TER and DER) and for ratings (SAP rating and environmental impact rating) are done with UK average weather.”

    Indicating that for ratings, SAP acts as a compliance tool alone, and purposefully uses the “average” to enable comparison across the country.

    Additionally, 9.91 states that “For costs and savings, total emissions and primary energy, the calculations are done using the climate region in which the property is situated”, while 9.92 states “Other calculations for which local weather is to be taken into account are done with the weather data for the applicable region.”

    (9.91 quotes from Section S13, http://www.bre.co.uk/filelibrary/SAP/2009/SAP_2009_9-91_Appendix_S.pdf, 9.92 quotes from Appendix U.)

    This indicates that for everything other than compliance and ratings (e.g. Green Deal calculations) the “local” climate is used.

    Essentially two calculations are carried out at the same time: one in the locality, one for a UK average. The GD uses the values provided from the localised assessment, the ratings use the assessment with the average.

    I think it speaks volumes that you and I, who both consider ourselves experts in this area have read the same documents and come away with two opposing understandings!

    You’ve got me thinking, I could do a whole blog myself, on SAP, the Green Deal, and invite guest bloggers like yourself…watch this space!

    Thanks again,

    Vicky

    June 6, 2013
    • Vicky,

      Rather than expressing polarised view of the interpretation of SAP/RdSAP, I would suggest that I am not in disagreement with the general principle of what you are promoting. The SAP model stands as an accomplished building energy model and within it there are very many variables that are expressly and variably taken into account and other factors which are included to be able to model energy flows within a domestic environment but which are not in themselves user driven.

      Within the context of the building standards system in the UK, the SAP methodology is utilised as a compliance tool as you correctly state and I doubt there would be much room for debate in that point. It is utilised in different ways across the devolved nations of the UK and as you have pointed out there are certain aspects of it which are constrained, this is invariably for the purposes of equability and even in some cases politics.

      My comments are not reflective of the application of SAP but rather the potential inherent within the full SAP methodology itself. Compliance has for many good reasons taken a universal approach i.e. it may not be technically or politically expedient to impose punitive conditions on the construction of buildings in harsher environments across the UK. We may argue that properties should be built to achieve a standard performance outcome regardless of their location in the UK, which would then require us to fully model the dynamic performance of them. However perhaps before getting to that argument we should first look at the in situ performance of building materials, heating and ventilation systems, the quality of construction and the performance degradation over time of active and passive systems which we install in properties to achieve increasingly tougher climate change targets.

      So it is to the full application of the SAP methodology which I have directed my comments in relation to the use of this model as a means of describing energy performance in relation to the external environment. The SAP model has come a long way since its first iterations both in accommodating for complex energy/ventilation systems within buildings and in reflecting the dynamic nature of a fabric model within a variable climate. However at the risk of sounding like defender of the SAP, there are still some areas in which it is sadly lacking, and this is a whole post graduate thesis in the waiting.

      Without digressing further, I will return to my primary query. Was your argument against the introduction of a Land and Building Transaction Tax or the introduction of such a tax in relation to SAP (the compliance tool)? SAP as a compliance tool and SAP as a building energy model are not entirely the same thing. Arguing against the introduction of an energy efficiency targeted LBTT because there are issues with the application of SAP/RdSAP perhaps belies the efficacy of a LBTT based on building energy performance to drive better standards in the existing built environment. If the application of SAP as RdSAP or as a building standards compliance model is the primary issue then it would be helpful to have the debate around how this could be rectified in order to get any future LBTT policy right.

      Lastly, Linkedin is already crammed with Green Deal discussion groups and blogs; it is quite a challenge to establish anything in this field that will have a loud enough voice to be heard above the noise of so many opinions. The Green Deal approach is such a new and untested policy that there is a huge potential for outcomes at both ends of the spectrum. Whether RdSAP and the “Golden Rule” is correct or not is likely to be a very small aspect of a much wider consumer issue.

      Regards,

      Scott.

      June 7, 2013
  3. Hi Scott,

    Thanks for getting back to me.

    The point I tried (and have possibly failed) to make is that an LBTT or stamp duty based on energy efficiency would have to ensure that the model used is sufficient for the job, and I don’t feel that RdSAP is sufficient. As for a postgrad thesis in the waiting, I’m writing mine up as we speak, so there will be one out there shortly!

    This blog is just one way of getting feedback on my opinions on SAP and RdSAP, so thanks for adding to the debate.

    I may come across as cynical, but I sincerely hope that the Green Deal and all the other DECC policies work. My first two degrees were in meteorology and climate change, and I am all too aware of the steep road ahead. Fixing our buildings is one thing, fixing our mindset is another. Lets just hope that as long as the debate continues, as long as people like you and I can discuss the issues, that the Government can listen and develop new ways of combating energy use in buildings.

    Thanks,

    Vicky

    June 7, 2013
  4. UPDATE: 26 June 2013.

    The LBTT Bill passed yesterday, and there is no energy or carbon performance criteria in the bill, as according to the minutes these motions were not moved on. However, Scottish Ministers are still required to set the tax bands and this is where the EPC could still come in.

    Bill as passed: http://www.scottish.parliament.uk/S4_Bills/Land%20and%20Buildings%20Transaction%20Tax%20Bill/b19bs4-aspassed.pdf

    Minutes: http://www.scottish.parliament.uk/S4_BusinessTeam/pm-v3n19-s4.pdf

    List of amendments as put forward for Stage 3: http://www.scottish.parliament.uk/S4_Bills/Land%20and%20Buildings%20Transaction%20Tax%20Bill/b19as4-stage3-ml.pdf

    June 26, 2013
  5. I enjoyed the discussion between you and Scot but wanted to jump in regarding the Green Deal. I do agree the interest rate attached to the loan is to high hovering around 7% and it may explain the slow start to the initiative. But i believe the real problem is that consumers are not getting all the correct information. free information sites like http://www.thegreendealuk.co.uk and https://www.gov.uk/green-deal-energy-saving-measures/overview can help. One things for sure we all agree that the UK need to reduce its energy consumption and its carbon emissions to secure the green future of the planet. Thats all i really hope for.

    May 16, 2014

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