• Carbon emissions are a major problem in the property industry which the government is committed to addressing.
  • A number of green property tax incentives are available but are they sufficient?

Buildings alone generate almost half of all CO2 emissions in the UK – 27% from the 26 million residential dwellings, and 17% from the 2 million non-domestic buildings.

As a result, in the 2008 Budget the government stated that it is considering policy options to address the carbon emissions of commercial buildings, with the overall objective of:

  • Making new buildings carbon neutral by 2019; and
  • Improving the energy efficiency of and reducing carbon emission from existing stock.

Such changes are obviously vital if the government is to reach its new target of a 80% reduction in carbon emissions by 2050.

NEW DEVELOPMENTS

At present green property tax incentives are primarily related to new development, and don't tend to be tied to carbon emissions or energy usage. These include:

  • Enhanced Capital Allowances

    100% first year allowances are available on expenditure on energy efficient plant and machinery, such as pipework insulation, high efficiency lighting units and solar thermal systems.

  • Land Remediation Relief

    Land remediation relief provides 150% allowances on expenditure incurred to remediate contaminated land. Following consultation and in light of the phasing out of the landfill tax exemption for remediating contaminated land, it was announced in the Pre-Budget Report that the relief will be extended to cover expenditure incurred on redeveloping derelict land and removing Japanese Knotweed with effect from 1 April 2009.

  • Business Premises Renovation Allowances

    As an incentive to bring derelict or unused properties back into use, first year allowances of up to 100% are available for expenditure on converting or renovating unused business premises in disadvantaged areas.

Going forward, it is likely that the range of these incentives will increase, or at least that the scope of existing little known incentives (such as Landlord's Energy Saving Allowance and Climate Change Levy Exemption) will be broadened to incentivise developers to build carbon neutral buildings.

RETROFITTING

But striving to make new developments carbon neutral will not be enough. Only 1-2% of commercial buildings are replaced each year and by 2050 about 70% of current stock will still be in use. Therefore, any serious attempt to lower emissions must deal with retrofitting existing commercial buildings. However, there are currently no effective tax incentives for improving the energy efficiency of existing commercial stock.

Although energy prices are rising, they often represent less than 2% of the overall running costs of a building. Therefore, based on energy prices alone, corporate tenants may not have sufficient economic incentives to take action to reduce their energy consumption, increase demand for greener buildings or consider paying a premium for buildings with better energy performance.

GOING FORWARD

We understand that the government intends to launch a major consultation on sustainability and existing property. This is long overdue. Whilst the main focus of the consultation will be residential property, it will also touch on commercial buildings. At this stage, the government is expected to focus on green property tax incentives in relation to VAT, SDLT, enhanced capital allowances and business rates.

There are potential difficulties with all of these "levers":

  • VAT is of limited scope as there is high VAT recovery across the property sector.
  • SDLT is promising as it would allow for efficient buildings to be sold at a reduced price, but would not easily allow for separate levels of performance.
  • Capital allowances may need to extend to the structure of the building itself to encourage appropriate investment. However, allowances are of limited benefit to REITs which have a material presence in the UK property market.
  • Concessions on business rates have the potential to be administratively complex.

In reality, government grants may even be required to encourage retrofitting. We don’t see any political will for grants at this stage, but change is coming.