Boost Your EPC Ratings: top tax tips for Commercial Landlords in 2025

Landlords with commercial property have since 2023 faced restrictions in renting properties with poor Energy Performance Certificate (EPC) ratings. They now need to prepare for further restrictions.

Currently, commercial properties with an EPC rating of E and above can be let, but a recent government Bill, Minimum Energy Performance of Buildings (No. 2) Bill, working its way through Parliament could see restrictions on new leases to and EPC rating of C or above by the end of 2025.

Landlords will have little choice but to implement often costly energy performance measures if they wish to continue to let commercial property in their portfolio.

There are, however, attractive tax positions for landlords depending on whether those enhancements are considered ‘revenue’ or ‘capital’ spend.

Here, we explain the difference and the tax implications.

Revenue vs capital: understanding the differences

Broadly, investment that makes improvements to commercial property is classified either a ‘revenue expense’ or ‘capital expense’, each resulting in different tax treatments.

If it is a revenue expense, the amount is deducted from taxable income in the year they are incurred. If considered a capital expense, typically a significant improvement to the property, it is possible to get tax relief by claiming capital allowance.

Some capital expenses qualify for Annual Investment Allowance or Full expensing, offering 100% tax relief on the capital items in the year they are incurred.

Examples of revenue and capital expenses

Revenue expenses will include, for example, the upgrading of windows or replacing boilers with ground or air source heat pumps. HMRC does not consider the use of modern materials or new technology as part of a repair an improvement to a property.

However, installing new solar panels or underfloor heating or adding thermal insulation to walls or roofs will be considered an improvement and therefore a capital expense opening the door to claiming capital allowances.

VAT implications of EPC related works for commercial landlords

Where VAT is incurred by landlords on works to improve the EPC rating of commercial properties, this will only be recoverable if the landlord has specifically Opted to Tax in respect of the building.  An Option to Tax means that VAT is charged on rents and other supplies of the property whilst allowing for VAT incurred on related expenditure to be recovered from HMRC.  Without an Option, the ordinary treatment of rents is exempt from VAT and thus VAT incurred on works would be irrecoverable.

Tap into structure and building allowance

Additionally, when a business incurs costs to renovate or convert the commercial property, these expenditures may qualify Structure and Building Allowances, which provide a flat rate of 3% of tax relief on qualifying expenditures per annum.

Therefore, when significant costs are incurred to enhance the EPC rating of a property, landlords will need to review and categorise these expenses accurately. This will help optimise their tax positions and prevent potential issues with HMRC.

Contact our Real Estate team today to find out how we can help you.