RPDT: Who and What will the new tax on residential developers catch?

Updated: 12 October 2021

Today (12 October) we heard from HM Treasury that:

• The RPDT will not apply to build-to-rent profits – this will be welcome news for property investors who let their properties.
• The RPDT will have an exemption for non-profit affordable housing providers, including their for-profit subsidiaries.

The draft RPDT legislation remains open for comment until 15 October.

Other key points are still, literally, marked with an “x” in the draft RPDT legislation – the rate of tax and the allowance/threshold above which RPDT will apply to RPD profits.

Also, no response to the consultation on policy design has yet been published.  HMRC has said it will publish this later.

Despite all of this, the timetable for the new tax is that it will be announced by the Chancellor at the Autumn Budget on 27 October, and come into effect from 1 April 2022.

The UK government announced the introduction of a new Residential Property Developer Tax as part of its Building Safety package. A consultation is underway, ahead of the inclusion of the RPDT in the 2021-2022 Finance Bill, and interested parties have until 22 July 2021 to make their views known.

The big picture – a unique tax

The proposed RPDT is unusual, with a number of details to be confirmed. The rate of the tax is not yet set, nor is its design determined. It is proposed to be time-limited to ten years, from April 2022. All the government really seems certain on is that it wants to raise at least £2bn over ten years to fund the remediation of cladding issues on high-rise buildings of more than 6 storeys tall.  And that large developers should fund this – the proposal is that all profits over £25m (where profit from UK residential constructions or conversions is a significant component) should be subject to the new tax.

How to measure those profits is a question in itself. Should it follow corporation tax profits or be based on pure accounting profit i.e. not allowing interest, capital allowances or prior losses be used to lower this profit?  There are many questions in the consultation paper. The government’s other key objective (apart from raising the £2bn) is not to adversely impact the supply of housing. It is hopeful that exempting smaller scale developers will achieve this, and that an increase in construction costs (so, including this new tax) may not be the key factor driving behaviour of home builders. However, this is perhaps the key question (of many; 43) that it asks in the consultation document: “Would you adjust your development plans, build out strategy, or land acquisition strategy in response to the implementation of this tax? If yes, how?”

Details – many TBD

Other key points and questions on which those designing the RPDT are seeking input include:

• The definition of residential property – hotels and communal residential homes (e.g. for children or elderly) are proposed to be excluded. But should student and retirement accommodation be included? What if care services are provided along with the accommodation – should these developments then be excluded? Does it make a difference if the property is self-contained (as opposed to, for example, a room in student halls)? The government’s thinking appears to lean towards including self-contained properties.
• The scope of the tax – it would apply to sales of residential development sites as well as constructed buildings. It would also capture build-to-let development models by taxing a notional profit (fair value of the building less development costs) at the time the building is brought into use for letting. The government is open to thoughts on how to deal with the accounting and commercial practicalities of measuring this notional profit.  Developers should note this “dry tax charge” – the tax will require to be paid despite there being no immediate income (unless a lease premium was paid).
• Mixed activities – where a company or group carries out resi and commercial property development (or other activities), what would be the best way to calculate the portion of resi activity, costs and profits? Different models are proposed. The first model is that the tax could simply apply to all corporation tax profits (i.e. would also tax the profits from non-resi activities), as long as the resi development activities were “significant” (a test of the resi part of overall turnover or activities perhaps).  Another model proposed is that the new tax could be based on identifying solely the resi development activities and taxing profit from those –this model then splits into doing this either by adjusting the CT profits to separate out resi profits, or by starting from a new calculation based on using normal accounting principles to calculate resi property profits as if that activity were a stand-alone division. Note that it is also proposed that adjustments would be made to the profit calculation to exclude the use of certain deductions and tax reliefs (e.g. no deduction for interest/ other funding costs and no lowering of the profit by considering group relief or losses etc). While the use of post April 2022 losses has not entirely been ruled out, the consultation document gives a strong steer on thinking here - noting that this would add much complexity, and to the time-frame for collecting the £2bn. The disallowance of deductions and losses in calculation profits may bring more developers into the scope of the tax than just those who consider themselves within the £25m+ profits headline.
• Judging a single economic entity – the aim is to look at aggregate resi profits of commonly owned entities. Should accounting consolidation rules to judge groupings be used rather than tax grouping concepts? It is noted in the document that supplementary rules may also be needed to capture the government’s “economic entity” concept.
• Joint ventures – the aim would be to tax joint venture structures, then give credit to the participating companies in the JV so there isn’t double tax.
• Anti-avoidance rules – these will be introduced to:
  • catch any attempt by companies to accelerate profits to beat the new tax;
  • prevent fragmentation of a company’s activities, avoiding the £25m profit threshold;
  • prevent companies attempting to re-characterise development income as for something else; and
  • deal with attempts to avoid the tax by selling a company rather than a property (e.g. rules similar to de-grouping rules or the transactions in land rules will be introduced to catch such sales).
• English high-rise levy - there will be a Gateway 2 levy, in addition to the proposed RPDT. It would apply to developers seeking permission to develop high-rise buildings (18+m) in England.  By contrast, the RDPT would apply to UK-wide resi development profits.  The government’s rationale for this is that all developers involved in the residential development market will benefit from the government’s interventions so all should pay the RPDT tax that will fund these. It’s likely this point may also garner submissions to the consultation.

Can you contribute?

The RPDT is proposed to come into effect for periods after 1 April 2022.  The consultation period runs until 22 July 2021 and, as described, there are many questions still to be answered. If you are a property developer with any comments on the consultation document there are details there on how to contribute your views.  Alternatively, if you would like to discuss comments or concerns on the proposed new tax please get in touch.