Lee Sharpe looks at the special tax reliefs for energy-saving installations, for landlords, and warns of a very useful relief which has only a few months left before it is abolished.
Many readers will remember a happy time, in the last decade, when combating climate change was a top government priority, and a range of green measures were introduced to encourage people to make their properties more energy-efficient.
Probably the most memorable of these was solar electric, with its fantastically generous feed-in tariffs, which pretty much guaranteed net positive returns within a few years. Solar panels suddenly became hugely popular, as property owners realised that there was gold on them rooftops. Then came the global recession and austerity; bankers vied with estate agents for the title of least popular profession. Solar feed-in tariffs were slashed. Mr Cameron’s favourite colour, it seemed, was no longer green.
We looked at the pros and cons of solar electric installations in the ‘renewable energy’ series of articles a couple of years ago; this article covers the special tax breaks for passive insulation costs.
Landlords’ energy saving allowance
The landlords’ energy savings allowance (LESA) was introduced in its original format for qualifying expenditure from April 2004. The LESA is available for ordinary residential property lettings and was designed to address the problem that tax relief for capital expenditure on property improvements – in the form of capital allowances – is blocked for items in dwellings.
For example, a hotel can get tax relief for installing air conditioning in its rooms, but not so for an ordinary property investment business with long-term residential lettings in flats, houses, or similar.
How much, and what on?
Unlike the capital allowances regime, the LESA is pretty straightforward. It is currently available for expenditure on:
- loft insulation;
- cavity wall insulation;
- solid wall insulation;
- draught proofing;
- hot water system insulation and
- floor insulation.
The maximum expenditure is now £1,500 per dwelling. It was originally £1,500 per building, which was clearly of little use to landlords in blocks of flats, but the rules were changed to apply to individual dwellings in April 2007 – owners of individual flats can now make full claims in respect of their own property, without having to compromise with fellow landlords.
Where the expenditure has been incurred on eligible and ineligible properties together (typically cavity wall insulation on a property with a residential first floor and commercial ground floor premises), then it is fine to apportion the expenditure and make a part-claim on a reasonable basis.
Retro-fit
The LESA was intended to incentivise landlords of older, less energy-efficient properties, to bring them up to more modern higher standards. Of course, there may well be additional energy-saving improvements that could be made later on, even to relatively new properties, but the LESA cannot be claimed on expenditure when the property is still being built.
Further exclusions
- Not available for dwellings where the landlord is claiming rent-a-room relief.
- Not available for special furnished holiday lettings – but they can potentially claim capital allowances instead, like hotels.
- There are also limitations where the landlord doesn’t yet have an interest in the land, or where the lettings business has not yet started.
LESA available only until April 2015
Unfortunately, the LESA will be abolished from 6 April 2015 for income tax purposes, and from 1 April 2015 for corporation tax purposes. Note, however, that it is only if the expenditure is incurred after these dates that there is a problem: it will still be possible to make a claim after those dates in respect of relevant expenditure actually incurred before then.
Capital allowances for improvements to commercial buildings – thermal insulation
Whilst the LESA is not available to commercial buildings, all is not lost, because the capital allowances regime was extended in 2008 to include thermal insulation on all properties other than dwellings. This means that hotels and furnished holiday lettings can qualify, as well as offices and other commercial buildings.
A significant benefit to thermal Insulation expenditure is that, unlike most capital allowances claims, it can be a permanent saving – there is no prospect of a balancing charge on the disposal of the asset because the disposal value is always nil.
The expenditure had to be incurred on or after 1 April 2008 for companies, and on or after 6 April 2008 for income tax purposes. Before then, it was only properties falling under the special classification of ‘industrial buildings’ that would qualify.
It is not available where incurred as part of the original construction costs – it must in effect be a ‘retro-fit’ to an existing building.
Special rate expenditure
Eligible expenditure is normally to be claimed only at the ‘special rate’ of capital allowances. The main rate for capital allowances is currently 18% per annum, while the special rate is only 8% per annum – it is ‘special’ only in that it is especially poor!
However, for most businesses, the annual investment allowance (AIA) offers an immediate 100% write-down on almost any expenditure (provided it in some way ranks for capital allowances) in the period of expenditure, so the relatively poor 8% rate may be avoided completely. At the moment, the AIA can cover expenditure of up to £500,000 per year – although it is set to fall to just £25,000 a year, at the end of 2015.
What qualifies as thermal insulation?
HMRC’s Capital Allowances manual suggests that they should be fairly broad-minded in its interpretation, listing double-glazing as potentially eligible, alongside more obvious candidates such as roof linings and cavity wall insulation. Interestingly, at CA22220, the manual states:
‘Sometimes expenditure may be incurred for more than one reason. For example, double-glazing may be installed to insulate against both noise and loss of heat. The expenditure will qualify...provided that it is clear that insulation against loss of heat is one of the main reasons why it was incurred.’
It seems to me that a similar argument might also be made for cladding, in the right circumstances.
Practical Tips:
The LESA is being phased out, but there will be many residential landlords who have already incurred eligible expenditure, before the deadline for withdrawal, and who may not have realised that a claim can be made. The claim can potentially still be made after April 2015, so long as the expense was incurred in time.
These reliefs are aimed at capital improvements. In some cases it may be possible instead to claim as ordinary maintenance or similar, where there is expenditure to replace existing assets. Even if the replacement is of superior quality, it is not always a capital improvement.
As regards thermal insulation for commercial properties only, whilst the AIA is so generous, the miserly 8% special rate should not be a major concern. But when (if) the AIA falls to the default £25,000 a year, then other special reliefs may become more relevant.
For example, there are numerous categories of expenditure on energy-saving and/or water-saving technologies, which rank for 100% immediate capital allowances, independently of the AIA, including pipework insulation. If parts of a property refurbishment project can qualify under these enhanced categories, there might be more of the AIA left over to cover thermal insulation.
