Could stamp duty reform be the answer to making UK homes net zero?

The problem

Record energy costs are impacting households, individuals and the wider economy. The world is warming and all UK industries must reach net zero by 2050 to meet government targets. The housing sector is no exception but, while strides are being taken in the energy efficiency of new homes, our existing housing stock poses a major problem.

The majority of homes in England are owner-occupied (65%) and, over the past decade, there has been little in the way of effective government policy or industry-led incentive to get homeowners to undertake the often expensive and disruptive changes needed to make homes greener. 

We have the oldest housing stock in Europe, with a fifth of homes dating from Edwardian times or older, but the UK cannot reach net zero without making drastic and potentially expensive changes to existing homes. 

The government’s Green Homes Grant scheme - which offered vouchers to help homeowners pay for energy efficiency work - ended in April 2021 having “underperformed badly”. The Public Accounts Committee described it as “a scheme with poor design and troubled implementation,” after only 47,500 homes out of an intended 600,000 were upgraded.

In 2023, heating and electricity for 29m homes accounts for 20% of our carbon emissions, using up 35% of our energy. While we all want cheaper household bills, there are currently few incentives for homeowners to spend the money needed to make homes energy secure.

Under government proposals, all homes in England and Wales will need to meet the government’s target of an Energy Performance Certificate (EPC) C rating by 2035 – that is 15m homes in need of energy efficiency work to meet this standard.

While most of us would choose to live in well-insulated homes with solar panels or heat source pumps, many households simply do not have the cash to make expensive renovations to meet higher EPC standards.

How would it work?

The energy saving stamp duty incentive would be a bolt-on to England’s existing stamp duty policy and would rely on reforms to the current EPC system.  

The energy saving stamp duty paid would be in addition to the current rates, meaning buyers would be liable to spend more in tax on energy-inefficient homes than on efficient ones.

The current stamp duty system is calculated as a percentage of the price agreed for a home, but the energy stamp duty would use a series of criteria reflected in the EPC.

An EPC is already a legal requirement of the vast majority of properties listed for sale. So, from the point it is listed, it would be possible to use an online calculator to work out the stamp duty to pay.

The stamp duty would go up or down based on the home’s EPC rating – so the better the energy performance, the lower the tax paid.

Once the buyer has bought the property, any energy improvements they make within two years of purchase, validated by an updated EPC, would trigger a rebate. For lower-value homes, the government could choose to enhance the rebate to subsidise the cost of measures.

In short, any recognised improvement in a home’s energy efficiency (such as the fabric, heating and services) would reduce the stamp duty paid.

If you are buying a lower-value home or are a first-time buyer, then you might not qualify for stamp duty. But it offers an incentive to earn some cash back if you make improvements.

The only exception to the rule would be listed homes, which do not require an EPC rating for sale and would be difficult to retrofit due to planning laws.

What are the downsides?

Stamp duty is not something that many homebuyers understand in its current form, and this proposal adds a layer of complexity that might make it even harder to fathom.

If this policy were to be adopted by the current or a future government it might stimulate a rush to buy or sell before it comes in, rather like the boom and then slowdown caused by the 2020 stamp duty holiday. 

Any attempt by policymakers to pull economic levers and twiddle housing market knobs has the potential to create a cooling effect on the market.

The proposals do not specify by how much stamp duty would increase based on the efficiency of a home – that is a decision for the government to make – which creates a degree of uncertainty.

House prices are another potential issue. Any additional tax will need to be paid for, and it may lead to offers on homes with poor energy efficiency that reflect the money that needs to be spent on them, which could cause prices to go down.

What do the government and opposition say?

Adams and his colleagues have been sharing their proposals with the current government, the Labour shadow cabinet and Liberal Democrat front bench. We asked each of them what they thought of the proposals: 

The Tory view

A Conservative Party spokesperson said it does not comment on speculation around tax changes. 

“Thanks to government support, the number of homes with an energy efficiency rating of C or above has gone from 13% in 2010 to 46% and rising. We are investing over £6.6bn in this parliament with a further £6bn committed to 2028 to reduce energy demand from buildings and industry by 15% by 2030,” the spokesperson said.

He added: “The Energy Company Obligation will help hundreds of thousands of families with energy-saving measures such as insulation, with average energy bill savings of around £300 a year.”

The Liberal Democrat view

“Liberal Democrats have long supported using the tax system to incentivise upgrading our draughty homes - stamp duty seems like the obvious solution,” Liberal Democrat housing spokesperson Helen Morgan MP told Housing Today.

“But this Conservative government needs to start listening. They have repeatedly failed to insulate our homes and have continued to allow the building of homes that will inevitably need retrofitting in the future.”  

She added: “What we need now is an emergency programme to improve the energy efficiency of our homes so we can work towards cutting bills and emissions.”

The Labour view 

Despite several efforts to contact the Labour Party, including the press office and shadow housing secretary Lisa Nandy’s office, we have yet to receive a reply. 

Housing-related policies that Labour has so far confirmed via the media have included their intention to meet housebuilding targets by building on “poor quality” green belt land and plans to overhaul obstacles for homebuilding by changing Compulsory Purchase Order laws. 

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What do industry leaders say? 

Steve Turner, executive director of the House Builders Federation, told Building that the organisation would back an energy efficiency stamp duty.

“We would be supportive of this [idea]. It would mean new-build buyers pay less stamp duty land tax when buying an energy efficient new-build – nearly all are A or B rated,” he said. 

“Given stamp duty isn’t mortgageable, it has a disproportionate benefit, too. If it could be combined with green mortgages – something else we are pushing – then all of a sudden new-builds would be comparatively cheaper.”

Lynne Sullivan, a RIBA architect and chair of National Retrofit Hub, said: “According to the current government policy, with effect from 2035, all homes have to be EPC rating C. This will effectively use stamp duty as a market mechanism.

“Rather than just having a sort of sword of Damocles coming down on you sometime in the 2030s, I think this would be a way of preparing people to make efficiencies on their homes.”