On 29th April 2021, HM Treasury released a consultation on a new Residential Property Developer Tax (RPDT) to apply from April 2022. The objective of the policy will require residential property developers to pay additional tax to fund the cost of remediating cladding issues which has been and will be borne by the Government.
Importantly, the new tax does not target only developers who have had cladding issues themselves, and developers who are developing high rise buildings (although a new levy has been introduced to target new developments of high rise buildings) – it currently has a much wider scope and would affect many future residential developments.
Although, the consultation document is silent on several key characteristics of RPDT, most notably the rate of tax, it does set out the Government’s thinking and a clear framework for this new tax. This article will explain the new RPDT policy in more detail.
The RPDT is set to apply from April 2022 to the annual profits of UK residential development activities. Whilst it is described as ‘time-limited’, there is no guidance yet as to how long the RPDT will be levied for.
It is the Government’s intention that only the “largest” residential property developers will be brought within the charge to RPDT and that it would cover profits from UK properties earned by both UK and non-UK resident companies. Specifically, the tax is to be levied where a group’s profits from UK residential property development activities exceed £25m per year (this £25m allowance cannot be carried forward to future periods). The definition of group has not yet been decided.
There are two proposed methods under discussion for companies to calculate their liability to RPDT:
- Tax all profits of a company which directly undertakes or contributes to a group UK residential property development activities (unless they are “insignificant”) or
- Tax just the relevant UK residential property development profits of a group.
Interestingly, the Government proposes that no interest or funding costs will be deductible in calculating profits liable to RPDT: this appears to apply to third party bank interest as well as intra-group borrowing. The key implication of this is that the £25m limit will, in practical terms, be far less generous and many more groups will have to pay RPDT.
This will expand the scope of RPDT beyond what many in the industry would normally consider to be the “largest” developers given the higher financing costs that many medium and smaller residential developers face. Further, in scenarios where a property/properties have been retained for a number of years, and as a result the financing cost has reduced the accounting profits, the rate of RPDT will become disproportionality high.
The consultation says that losses generated prior to the introduction of RPDT must be excluded from the calculation of UK development profits, but it does leave open the possibility of recognising brought-forward losses generated after the introduction of tax. While allowing losses generated after April 2022 to be carried forward for RPDT purposes would be fair, the Government recognises that this would bring additional complexity - particularly if the rules are aligned to the existing corporation loss restriction rules. Group relief from activities outside of the scope of the tax would not be available to reduce the profits subject to RPDT.
UK residential development activities
RPDT targets the profits of UK residential development activities and has a broad scope, covering the development of ‘dwellings’ for both build to sell and build to rent. The definitions of a ‘dwelling’ are broadly in line with those found in other taxes, such as the annual taxation of enveloped dwellings (ATED) and stamp duty land tax (SDLT). However, whilst there are specific caveats as to what constitutes a ‘dwelling’ under ATED and SDLT legislation, it has not been yet decided that the same caveats will apply to the RPDT.
The consultation document includes a number of carve-outs and potential carve-outs from the definition of ‘dwellings’, these include the common carve-outs for ‘communal dwellings’ such as hotels, supported housing providing care/support for vulnerable groups, accommodation for members of the armed forces prisons etc. In setting out these carve-outs, the Government also provided some direction on its thinking in several key areas:
- Build-to-rent - Importantly, build-to-rent also appears to be within the charge – with a suggestion that profits from this activity for RPDT purposes will be determined based on a notional market value calculation upon initial rental of a completed property. If introduced in this way, this will therefore introduce a ‘dry tax charge', for build-to-rent developers. Therefore, this would be a tax that spans not only conventional “development activities” and companies that hold stock on their balance sheet but also entities that hold property as fixed asset investments.
- Student accommodation - Consideration is being given to the extent to which student accommodation falls within the scope of RPDT and it is possible that some or all student accommodation being developed will fall within the charge. The consultation document suggests that the final rules are likely to draw a distinction between the more ‘traditional’ halls style accommodation and more ‘modern’ flats (self-contained or cluster) with the former more likely to be exempt from RPDT.
- Affordable housing – Profits from the development of affordable housing would fall within the scope of RPDT: the Government does not view this as contrary to its goal to increase the availability of affordable housing. The Consultation notes that such development is typically either undertaken at cost due to s106 planning obligations or by charitable or otherwise tax exempt organisations (with there being no intention to disturb the existing tax exemptions for charitable activities). However, the Government does recognise that affordable housing is also developed on a for-profit basis and welcomes views on the implications of taxing profits from such activity.
- Care homes and assisted living - While the development of residential and supported housing is specifically carved-out, the consultation leaves open the option to charge RPDT on the development of retirement housing that is not reliant on care provision. This will create new complexity for businesses developing retirement communities where a varying level of care is provided to residents.
Joint venture enterprises will be liable to the RPDT if they have ‘relatively significant economic interest’ (not yet defined) in a vehicle liable to the RPDT. They will be taxed on a two tier approach covering Profits or the JV structure as if it were a standalone group and, separately, the profits of each JV member’s ownership of the JV as part of the member’s group’s RPDT profits: RPDT tax credits will be given to prevent double taxation.
It is currently proposed that the payment dates would be aligned with corporation tax payment deadlines, including the recently introduced ‘super-QIPs’ regime that requires all corporation tax payments to be paid before the end of the year. This will inevitably compound issues for developers with ‘lumpy’ (one off/irregular profits) and will increase the requirement of greater scale developers to monitor their profits closely throughout the year.
The RPDT is in the early stages of development but is being introduced in relatively short-order. It is difficult to reach firm conclusions on its full implications until the rate of tax is confirmed and the results of the consultation are published (expected to be later this year).
However, one theme is already clear, by introducing a tax on specific profits that are different from normal profits liable to corporation tax the Government is creating considerable additional complexity and costs for the UK residential property sector.
For more information on the impact a new UK Residential Property Developer Tax may have on you or your business please get in touch with members of our Tax team, Rob Brown and Mark Harman.