Following the Government’s announcement on 10 February 2021 of a new levy on 'large property developers' intended contribute towards the cost of funding the £5 billion Government scheme to facilitate the remediation of unsafe ‘Grenfell’ types of cladding on high-rise residential buildings, on 29 April 2021 the Government released a consultation on a new Residential Property Developer Tax ('RPDT') which is set to apply from April 2022.
The RPDT is part of a package of measures announced by the Government that are designed to ensure the construction industry takes collective responsibility for historic building fire safety defects and pays 'its fair share' towards the cost of remediating unsafe cladding on high-rise residential buildings.
The Government intends for the RPDT to be time-limited, aiming to raise at least £2 billion over a period of 10 years. However, the Government has warned that if insufficient revenue is generated in this time, it will consider extending the duration of the RPDT. The rate for the RPDT is yet to be set and it is anticipated that this will be announced in the Autumn budget.
Who will be taxed?
It is the Government’s intention that only the 'largest' residential property developers will be affected by the RPDT. Companies will fall within the scope of the RPDT if they:
- undertake UK residential property development activities; and
- generate relevant profits that exceed the £25 million allowance available to them (note, this allowance cannot be carried forward to future periods).
This scope includes non-UK resident companies who undertake UK residential property development opportunities. The tax is to be levied in addition to corporation tax and is not corporation tax in and of itself.
It is important to note that the proposed RPDT does not only target developers who have had historic cladding issues, or developers who are developing high rise buildings, but will be applicable to any developer carrying out residential property development who falls within the above scope. As such, it is anticipated that developers who have had little or no involvement in the development of high-rise buildings that require remediation will be subject to the RPDT.
What is 'residential property development'?
The Government intends the RPDT to apply to:
'…a house or flat that is considered as a single residence, generally together with the grounds and garden or any other land intended for the benefit of the dwelling'
This builds on existing definitions of 'residential property' which we have seen in other taxes, such as Stamp Duty Land Tax ('SDLT'). The definition will be extended to also include future residential use, for example undeveloped land or land undergoing a change in use for which planning permission to construct residential property has been obtained.
The Government has highlighted some key areas to note:
- Affordable housing: any profits arising from affordable housing should fall within the scope of the RPDT. However, developers operating at a cost only return or charitable developers (for which an exemption would apply, for example the large housing associations) may be unaffected by the tax. The Government does not view this approach as inconsistent with its affordable housing targets.
- Communal dwellings: communal dwellings such as hotels, residential homes for children, prisons etc. would be excluded. However, certain types of student accommodation and retirement living may be in scope.
- Built-to-rent: built-to-rent properties also fall within the scope of the charge. This adds an additional challenge with determining the development profit if the property is held for investment. There is a suggestion that profits will be determined based on a notional market value calculation upon initial rental of a completed property.
How will companies be taxed?
There are currently two proposed models to determine liability for RPDT:
- Tax all profits of companies that directly undertake or contributes to UK residential property development (provided such activity is 'significant').
- Tax profits from UK residential property development activity only.
Joint venture enterprises will also fall under the scope of the RPDT if they have 'relatively significant economic interest' in a vehicle liable to the RPDT. Note that 'relatively significant economic interest' is yet to be defined. A two-tier approach to taxation will be adopted:
- Taxation on profits of the JV structure as if they were a standalone group.
- Taxation on profits of each JV member’s ownership of the JV as part of the group’s RPDT profits.
Double taxation would be avoided through the granting of RPDT tax credits.
Get involved:
The consultation will run from 29 April to 22 July 2021. Groups and joint ventures undertaking UK residential property development will undoubtedly be keen to engage in order to better determine how the RPDT could affect them.
If you have any queries regarding the RPDT please contact Tom Hewitt, if you have any queries regarding the wider measures to be put in place by the Government in relation to the rectification of fire safety issues in high-rise residential buildings please contact Tom Weld.