New Residential Property Developer Tax - Five key issues

The Residential Property Developer Tax (RPDT) is a new tax that will take effect on 1 April 2022. It will be levied on large residential developers to help fund the costs of cladding remediation works. The Government expects to raise at least £2bn over a decade. The final design of the tax, including the rate of the tax, will be announced at the Autumn Budget on 27 October 2021.

The Treasury initially consulted on the general policy behind the tax in April 2021 which, as expected, generated substantial feedback. Following that consultation exercise, the Government published draft legislation of the RPDT for technical consultation which ran from 20 September until 15 October 2021. The aim is to finalise the legislation in time for inclusion in the Finance Bill 2022.

This briefing is not designed to be an in depth analysis of the machinery of the tax itself but looks at how the tax will apply to residential property developers. Ahead of the Autumn Budget, here are five key points that you should know about the RPDT:

1. A tax on profits

The draft legislation provides that the RPDT will be charged on residential property development profits in relation to accounting periods ending on or after 1 April 2022 (with an apportionment for accounting periods which straddle this date). Unusually, the Government has made it clear that this new tax will be time-limited. The intention is that it will last for ten years. However, the Government will consider extending this period if it does not raise sufficient funds.

During the earlier consultation phase, it had been mooted that the RPDT would only apply to companies where property development profits exceeded a group-wide annual allowance of £25 million. However, the figure for the allowance is notably absent from the draft legislation. It seems we must wait until the Autumn Budget for clarification on this point but there is no suggestion that the allowance threshold will change.

2. Applies to residential property developers

For the purposes of the RPDT, a residential property developer is defined as a company that is ‘within the charge to corporation tax’. Therefore, it will not apply to charities, meaning that charitable housing associations should be out of scope but any taxable subsidiaries will be caught.

The RPDT will operate as an entirely separate tax on the developer with further provisions dealing with how the tax will apply to ‘related companies’ such as group companies and joint ventures. Joint venture companies will be taken into account where the RP developer, or a member of the same group as the RP developer, holds a 10% or greater interest in the joint venture company.

The developer must have an interest in the land at some point in order for development activities to be subject to the RPDT. A company is deemed to hold an interest in land if an interest in it is held by any related company. This is to ensure that where a developer company has or had an interest in land, the base for the tax includes RPD profits from any related company involved in the development of the land. This requirement for an interest in land should mean that profits from development activities undertaken by companies acting solely as third-party contractors and who are not the RP developer will not be liable to pay the tax.

3. Residential property development activities are in scope

The tax captures profits from residential property development activities (RPD activities) on, or in connection with, land in the UK in which the residential developer has a land interest. It is defined in this way to ensure the tax cannot be avoided by fragmenting development activity between different group companies.

Having an "interest" in the land covers any situation where the developer has (or had) a beneficial interest in land but also extends to having the benefit of a condition, obligation or restriction which affects the value of the relevant land (but excludes a licence or a security interest), and which forms or has formed part of its trading stock of a trade. Therefore, entities that hold a land interest as an investment rather than trading stock should not be subject to the RPDT. However, the tax applies group-wide, so an investor will need to consider the activities of the whole group in order to determine the scope of any RPDT liability.

The draft legislation contains a "non-exhaustive" list of RPD activities which include dealing, designing, constructing or adapting residential property, but also includes ‘seeking planning permission in relation to it’. Profits from these are all included within the RPD’s base for the tax. This may therefore be relevant where companies in the same group carry out different operations in the development chain and one or more members of the group has or had a land interest.

It is also the case that residential property is broadly defined. As might be expected it refers to buildings designed or adapted for use as a dwelling and any general amenity land which is provided as part of the residential development but it extends to land where planning permission is being sought or has been granted for residential property development, and land where residential properties are in the course of construction. Again, it seems that this definition is intentionally broad and will mean that the RPDT does not just include profits from selling completed dwellings but will for example, also catch undeveloped land with the benefit of planning permission or a development that has reached the "golden brick" stage.

4. "Build-to-Rent" should be out of scope

Certain types of “communal dwellings” are exempt from the charge. These include prisons, hospitals, care homes and residences for police and armed forces. When the Government launched the latest technical consultation on the draft legislation last month it was confirmed that student accommodation would also be excluded. Amendments to the draft legislation, published on 8 October 2021, also confirmed that “non-profit housing companies”, currently defined as non-profit registered providers of social housing in England, registered social landlords in Wales and Scotland and registered housing associations in Northern Ireland and their wholly-owned subsidiaries are also exempt.

Because build-to-rent developments are generally held as investments, the Government envisaged a dry tax charge for BTR investors - the intention being that the tax would be charged on the notional profit from a deemed market value sale on practical completion. The British Property Federation, amongst others, has voiced its concern that it would be disproportionate to bring build-to-rent within the scope of the RPDT as build -to-rent investor-developers usually remain liable for any cladding remediation works and do not re-charge these costs to their tenants who only have short term tenancies.

We are hearing from the Government that it has decided that BTR will be exempt from the RPDT. Therefore, it now seems likely that the RPDT will only apply where an interest in land is held as stock in trade and will not apply where property is held for investment purposes. The Government has indicated that it will not be necessary to make any further amendments to the draft legislation as BTR will now fall out of scope.

5. Don’t forget about the Building Safety Levy

Many in the Real Estate sector are concerned about the potential "double whammy" of the RPDT and the developer levy that will be introduced when the Building Safety Bill (currently making its way through Parliament) is enacted. Again, this levy is designed to meet the Government's costs of remediating unsafe high-rise residential buildings.

Whereas liability to pay the RPDT will depend on a company's profits, the levy will apply to developers seeking building control approval to start construction of new higher-risk residential buildings in England, including conversions which bring an existing building into scope, such as an office to residential conversion. Developers will not be able to start building work without paying the levy.

The Government is aware of the onerous financial implications of liability to both the RPDT and the levy, and has invited industry comment in a consultation that closed on 15 October 2021. Their indicative timetable for implementation suggests that we can expect the levy to be introduced by the end of 2023.

Comment

It is currently unclear how this tax will impact housing delivery. There is no doubt that the RPDT will have to be taken into account when assessing the viability of a residential development and where viability is adversely affected then this may lead to a reduction in the delivery of new homes.

The final version of the legislation is due to be published at the Budget on 27 October. We also expect an announcement of the rate and the RPDT tax-free allowance at the same time.