UK Property Taxes Facing Net Zero Transition Need Aligned Policy

The UK government made growth its central mission when it took office last year. But despite ambitious promises, the economy has flatlined.

At the same time, ministers are doubling down on climate commitments. From 2027, all commercial properties in England and Wales being offered to lease must achieve an energy performance certificate rating of at least a C, rising to a B by 2030.

The combination of stagnant growth and tightening energy efficiency standards creates a policy test that the UK government can’t afford to fail. Without urgent reform, the UK’s business rates system will deter the very investment needed to deliver both growth and net zero.

Why This Matters

Commercial landlords face mounting pressure to upgrade. An estimated 58% of Central London office stock is below the 2030 B threshold. Across the economy, from warehouses to shopping centers, billions in capital will be needed.

Landlords who breach the rules face fines of up to 20% of the property’s rateable value, capped at £150,000 ($202,000). Rateable value is the figure set by the Valuation Office Agency as the estimated annual rental value of a property on a fixed “antecedent valuation date,” and is used to calculate property tax liabilities.

In addition, offenders risk the reputational cost of being publicly named.

Meanwhile, business rates—the UK’s longstanding non-domestic property tax—are operating on a repair assumption, valuing buildings as leasable even when minimum energy efficiency standards, or MEES, prohibit them from being marketed.

The effect is stark: A warehouse or office that can’t legally be leased is still taxed as though fully marketable. Limited three- or six-month exemptions for empty property provide only a short respite. Once they expire, full liabilities resume.

Environmental regulation is advancing, but the tax system is standing still.

Some landlords have asked whether the “occupation prohibited by law” exemption could apply. But the exemption only engages when occupation is prohibited. MEES blocks leasing, not owner-occupation. In practice, the statutory escape route is blocked.

Incentives Don’t Deliver

To encourage upgrades, the government introduced improvement relief in April 2024. In principle, it provides a 12-month exemption from higher property taxes after qualifying works.

But improvement relief is fundamentally tied to occupation. The same occupier must remain in place throughout a program of improvements that demonstrably enhance the rateable value. That rules out most landlord-funded works, since landlords rarely take occupation.

In practice, landlords typically pursue deletion from the rating list during major refurbishments. To achieve a deletion, the hereditament (a legal term meaning a unit of property liable for non-domestic rates) must cease to exist, with works so extensive that it is incapable of occupation. In such cases, liability is lifted while the property is out of the list, and a fresh three- or six-month empty rates exemption begins once the space re-enters the list as taxable.

Where works are less extensive—within the ambit of repair—the property stays on the list. Improvement relief might apply where the landlord funds the tenant-occupier works, but landlords themselves won’t qualify if they carry out works to a vacant property.

Smaller “green” upgrades often don’t trigger deletion or a rateable value increase, leaving landlords paying full rates once standard exemptions expire.

The numbers confirm the weakness of improvement relief: Local authorities forecast only £5 million of awards this year and, while likely to increase, this is negligible against the billions needed for compliance.

This misalignment isn’t confined to Central London offices. Around 80% of regional office stock will fall short of the 2030 threshold, with similar challenges across retail, hospitality, and industrial sectors.

If unreformed, business rates will continue treating these properties as fully leasable. The result is suppressed investment, distorted valuations, and a tax system that undermines, rather than supports, the UK’s net-zero transition.

Unlike pandemic closures—disregarded as short-term shocks—MEES is permanent. Treating it as temporary is a fundamental misdiagnosis.

If the UK government is serious about mobilizing the billions needed to decarbonize its built environment, fiscal policy must evolve alongside environmental regulation. That requires:

A new scheme for landlords. Relief shouldn’t be tied solely to occupation but should provide support where green works are carried out within the ambit of repair. This could be achieved by extending the existing three- or six-month empty property exemption or by creating a dedicated allowance for qualifying upgrades that raise the rateable value. A fresh exemption period on that increase could then apply once other reliefs and exemptions are exhausted.

Reformed improvement relief. For occupiers, the relief period should be extended to two to five years, with conditions adjusted to reflect the true investment cycle of commercial property.

Synchronized timelines. MEES thresholds tighten in 2027 and 2030, but future rating revaluations aren’t scheduled until 2029 and 2032, leaving years of misalignment unless interim measures are introduced.

Finally, reform must support a just transition—recognizing that stranded assets affect not only landlords but also jobs, supply chains, and local regeneration projects.

Opportunity for Government

This isn’t only a policy problem, it’s also a growth opportunity. Aligning business rates with MEES would unlock billions in private investment, accelerate decarbonization, and deliver the economic boost the UK urgently needs.

Chancellor Rachel Reeves has set her strategy around “stability , investment, and reform.” Adjusting business rates to reflect MEES ticks all three. For a government in search of credible growth levers, this is low-hanging fruit—a way to marry environmental ambition with fiscal reality.

The collision between MEES and business rates highlights the urgent need to modernize tax systems for the net-zero transition. Left unresolved, the contradiction will deter the very investment the government is seeking to attract.

The message is simple: Without alignment, business rates won’t enable net zero or growth—they will stand in the way.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alex Probyn is the practice leader for Europe and Asia-Pacific at Ryan, a global tax services and software firm, and brings more than 25 years of experience in the commercial real estate sector.

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