In the Autumn Budget the Chancellor confirmed that a new Residential Property Developer Tax (‘RPDT’) will be levied on developers of residential property in the UK with profits over £25 million at a rate of 4%.
RPDT will apply from 1 April 2022 and is expected to contribute a minimum of £2 billion over a decade towards government funding for the removal of unsafe cladding from certain high-risk buildings. The announcement has not been met with unbridled enthusiasm by leaseholders: this is not new funding and leaseholders still have many concerns about building safety and remediation costs that are not covered by public funding. The current total pot of £5 billion does not provide anything like the comprehensive remediation fund recommended by the House of Commons Select Committee earlier this year. The Committee estimates the figure at closer to £15 billion.
Key points of the RPDT
- The tax will apply to all companies undertaking residential property development (‘RPD’) activities on profits exceeding an annual allowance of £25 million.
- Companies are only taxable if they, their group or a related party has, or had, an interest in land and where they hold the interest as trading stock.
- ‘Residential property’ refers to any buildings designed, intended, adapted, converted or restored for residential purposes. It also includes undeveloped land in respect of which planning permission to construct residential property has been obtained or is being sought.
- RPD activities include dealing in, or constructing, residential property; seeking planning permission and marketing (it will therefore capture land promoters); and managing residential property. A wide range of activities is included to prevent dissemination of profits from a developer company to other group companies.
- However, the annual allowance will be applied on a group wide basis and can be allocated by the group between its companies as it sees fit. The larger developers may already be considering if they should re-structure themselves in a way that would avoid or offset some of the tax.
- A company may be subject to RPDT once it no longer has an interest in the land at the time the RPD activities are carried out, if the RPD activities include designing, seeking planning permission in relation to, constructing or adapting the residential property and the activities were planned or anticipated at the time the company ceased to have the interest in the land.
- The tax will be treated as an extension to corporation tax but there will be no separate registration process and RPDT will be reported using the corporation tax return. However, RPDT will be ignored and no allowance made when calculating mainstream corporation tax.
- There will be no relief for finance costs or for losses derived from other activities and unused allowances cannot be carried forward or back.
- There will be no grandfathering rules for developments already under construction on 1 April 2022. These developments will be caught if profits accrue after that date and rules will be brought in to prevent profits being accelerated to a period before this date.
- Non-resident companies will be caught by the tax if they fall within the criteria.
- The tax is a temporary measure, expected to run for ten years. It will be repealed once the government decides that “sufficient revenue has been raised”.
- Property investors are currently excluded from paying the tax. Student and build-to-rent (‘BTR’) developments will therefore be exempt but an exit charge will apply where a corporate body benefitting from the exemption ceases to qualify for it. The BTR exemption will be kept under review.
- Non-profit housing associations and their wholly-owned subsidiaries or joint venture partners will also be exempt but the government has not exempted all providers of affordable housing. It believes that providers who make profit on affordable housing should pay the tax.
- Residential buildings used for institutional or charitable purposes and care homes will also be exempt but the government has confirmed that housing with support (‘assisted living’) will not be exempt, as it is considered more akin to mainstream residential dwellings. This means that retirement villages and other housing for the elderly that do not include personal care will be subject to the tax.
- Hotels, hospitals, homes or other institutions providing residential accommodation for children, and prisons will be exempt, as will residential accommodation for members of the armed forces, emergency services or hospital workers.
Overlap with Gateway 2 Levy
Consultees raised concerns over the scope and potential overlap between RPDT and the proposed Building Safety Levy (also known as the Gateway 2 Levy). We are awaiting the government’s full consultation response and details on this additional levy but it is clear that the Treasury sees the two taxes as distinct: one is a tax on profits, and the other a single, one-off payment charged on the development of residential buildings.
Impact on housing delivery
The government claims that any impact on house prices and transactions will be negligible, as new builds account for a small share of overall market transactions. Some developers disagree although the majority of house builders may avoid paying the new tax: only 31 developers made enough profit in 2019, the last time the building industry was not disrupted by the pandemic.
However, since profits will be calculated without deduction for finance costs, the £25 million threshold might catch more companies than previously forecast, despite the government’s stated intention to capture only the ‘largest’ residential property developers in the UK.
NO NEW FUNDING FOR CLADDING REMEDIATION
There were no new funding announcements for cladding remediation in the Autumn Budget: the £5 billion figure relates to funding that has already been allocated in a piecemeal fashion since 2019. And although RPDT will apply to all residential development within the scope of the tax, public funding for cladding replacement is still restricted to high-rise buildings (18 metres and above).
In February this year the government announced that owners of flats in blocks between 11 and 18 metres would be eligible to apply for a £50 a month loan. Details of the loans scheme have never been published and last week Mr Gove, reflecting the views of leaseholders, told the Housing, Communities and Local Government Committee that the scheme was on hold because -
“I’m still unhappy with the principle of leaseholders having to pay at all, no matter how effective a scheme might be in capping their costs or not hitting them too hard at any one time. My question is why do they have to pay at all?”
Affected leaseholders have been asking this question since Grenfell Tower burned down. Mr Gove will be bringing forward proposals to replace the loan scheme in the coming weeks.
If you would like any further information, please contact a member of the Commercial Property team.
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