EPC changes and your SIPP or SSAS held commercial property

Energy Performance Certificate rules are changing from April 2023. Here's what you need to know if you use a SIPP or SSAS...

Trustees holding commercial property in a SIPP or SSAS will appreciate the advantages that holding this asset could bring, including the potential for attractive rental yields and strong capital returns. 

There are, however, some strict property-related rules by which SIPP and SSAS trustees need to abide.

As well as the legislative pensions tax rules, SIPP and SSAS trustees must also observe the same legal requirements for commercial property ownership as any other landlord. One of these legal requirements involves Energy Performance Certificates (EPC).

Nowadays, almost all commercial property needs to have an EPC in place if it is to be either sold or let. 

There are some exceptions to this general rule, including open farmland, or (in certain circumstances) buildings that are used solely for storage. However, most properties need to comply.

The EPC provides a potential buyer or tenant with an overview of the energy efficiency of the commercial property in question. An important indicator of the building’s energy efficiency is provided on the Certificate in the form of a rating from A to G, where ‘A’ indicates excellent energy efficiency - and ‘G’ the precise opposite.

Under current rules, non-exempt commercial properties which have an EPC rating lower than an ‘E’ cannot be sold, nor let to a potential new tenant.

What is changing?

From 1 April 2023 - whilst non-exempt properties with an EPC rating lower than ‘E’ will still not be able to be sold, nor let to new tenants, a new requirement is being introduced, which means that those properties may not continue to be let to existing tenants. 

This requirement will change again in 2027 and 2030, when minimum EPC ratings of ‘C’ and ‘B’ respectively will be required. 

Where properties are not brought up to the required standard to gain an EPC rating of ‘E’ or above, financial penalties can be imposed, and the enforcement authorities may publicly 'name and shame' the landlord involved. 

What action is required? 

The first step would be to check the current EPC rating for the property (or properties) that are held as an asset of the SIPP or SSAS. 

Where any properties have a current rating of ‘F’ or ‘G’ and are not exempt from the regulations (see below), then work should immediately be undertaken by the scheme trustee(s), in their capacity as the landlord of the property, to bring the rating up to an ‘E’ - or better. 

It is also important to check that any current lease permits the landlord to undertake those works and, if so, whether those costs are recoverable from the tenant.

Given the anticipated future changes to these regulations in 2027 and 2030, it is worth investigating whether the property can be 'future-proofed', and its energy efficiency brought up to a level that will also satisfy those future regulatory changes.

What exemptions are available? 

Exemptions are available to commercial property landlords in certain circumstances.

These exemptions include: 

1. Lack of required third party consent; for example, from a tenant or planning authority.
2. Works that will not 'pay back' the investment in seven years or less.
3. Works that would devalue the property by more than 5% (supported by independent valuation evidence).
4. Where a new landlord purchases a non-compliant property, for which there is a six-month grace period to bring the property up to the minimum rating.
5. All improvements have been made, but the rating cannot reach the minimum required.
6. Short leases of under six months (subject to conditions). 
7. Long leases of 99 years or more; for example, freehold ground rent assets. 

To benefit from these, however, landlords must register the property or properties on the Private Rented Sector (PRS) Exemptions Register.

Affected SIPP and SSAS trustees should read this guidance.  

Or visit the PRS Exemptions Register itself.

Any further queries?

If the SIPP or SSAS trustees have any queries relating to this matter, they can contact their usual Barnett Waddingham Client Manager. Please note, however, that Barnett Waddingham are not property experts, and specialist advice from a surveyor or EPC expert is likely to be needed in respect of the scheme’s particular property.