In response to the unsafe cladding crisis, one limb of the government’s five-point plan, the “Building Safety Package”, is to introduce a new tax on residential developers “to ensure developers play their part and make a fair contribution”. The new Residential Property Developer Tax (RPDT) will come into force in April 2022.
The objective of the new tax is to raise at least £2 billion over a 10-year period from its introduction in 2022, by taxing the largest corporate residential property developers on their profits attributable to UK residential property development. These funds will be put towards the removal of unsafe cladding from high risk residential buildings.
Will all property companies be subject to the RPDT?
The RPDT will be applied to profits in excess of £25 million per year arising to group companies engaged in UK residential property development. Profits in excess of this allowance will be taxed at a 4% rate. The tax will apply to profits arising in accounting periods ending on or after 1 April 2022, with profits from periods straddling that date being apportioned. The tax will be charged as if it were an amount of corporation tax payable by the company, so should be relatively straightforward for companies to administer.
There are some nuances and the originally proposed scope of the tax has been significantly narrowed following consultation. Student accommodation and homes or institutions providing personal care for residents are some of the specific exceptions. Profits arising from activities which are not undertaken in connection to residential property development, for example separate management activity, will not be subject to the tax. A developer company must have an interest in the land at some point for development activity there to be subject to the tax – thus profits from development arising to third party contractors with no interest in the land will not be subject to the RPDT. The tax will only apply in relation to land which is held as trading stock by the developer, so property investors, and the build-to-rent sector will be excluded from the tax. Profits arising from commercial development, or residential development outside of the UK will also not be subject to the tax.
How will the RPDT apply to joint ventures?
The tax will apply to companies that carry out residential development activities of their own, and also to companies which have a substantial interest (i.e. at least 10% of the shares or entitlement to at least 10% of the profits available for distribution) in a joint venture company. A company’s interest in a joint venture is aggregated with other members of the same group to determine whether the interest is substantial. The relevant proportion of the joint venture’s profits or losses will be attributable to the developer for the purposes of calculating the RPDT.
Will the RPDT include charities and affordable housing in its scope?
Whilst affordable housing development is generally at-cost rather than profit generating, the government intends that affordable housing will fall within the scope of residential property development, and any profits made in relation to the development of affordable housing should therefore fall within the scope of the new tax. This means that developers will be subject to the tax in relation to any affordable housing they build. However, entities which qualify as a “non-profit housing company” (broadly, these are registered providers of social housing) and their wholly owned subsidiaries will be exempted from the tax, subject to an exit charge where a company ceases to qualify for the exemption. In addition, any trading profits from residential property development activities that are carried out by a charitable company and applied for the purposes of the charitable company are ignored for the purposes of the RPDT.
What to do before RPDT comes into effect?
Most property companies including investment, build-to-rent, social housing providers, commercial property developers and third-party contractors will not be affected by the tax. Smaller residential property developers who will not exceed the £25 million allowance threshold shall also not be affected by the new tax. However, these out-of-scope companies should take time ahead of the RPDT’s implementation to understand on what basis they are excluded. Excluded companies should also monitor the criteria over the proposed 10 year life of the tax. Larger residential developers will need to spend time considering how the new tax will operate in relation to their group and joint venture interests ahead of its introduction in April 2022. These in-scope developers will need to make sure they will have the systems and expertise in place to calculate and administer the RPDT in line with their broader corporation tax compliance obligations.