How will Residential Property Developer Tax work in practice?
The autumn Budget on 27 October 2021 included the announcement that Residential Property Developer Tax will be levied at 4% on companies or corporate groups who have annual profits in excess of £25m and who undertake UK residential property development. HM Treasury has been clear that it sees RPDT as ‘time limited’, with the goal of raising c. £2bn of revenue over a 10-year period.
The tax will apply from April 2022 and the additional tax is to fund the cost of remediating cladding issues which has been and will be borne by the government.
Since we last wrote about RPDT in June, the draft legislation has been published and a number of important points have been clarified.
Who will be affected by Residential Property Developer Tax?
RPDT will apply to individual companies and corporate groups that engage in residential development. Property investors (now specifically including those using a build-to-rent model) are excluded.
The company has to be within the charge to UK corporation tax. This means that as well as companies incorporated in the UK, companies incorporated elsewhere in the world which are centrally managed and controlled in the UK, or which trade in the UK through a permanent establishment, will each be subject to RPDT where they undertake residential property development activities.
RPDT applies where there has been a legal interest at some point – don’t overlook Joint Ventures
The developer, or a related party, must have, or have had, an interest in land – i.e. freehold or leasehold. This excludes the profits of third-party construction companies contracting to develop residential property from Residential Property Developer Tax.
However, where they have previously held an interest in the land for example in a forward funding transaction, the profits of any design, construction and assistance with obtaining planning permission services will within the scope of RPDT (subject to their profits being in excess of £25m).
Shareholdings in joint venture companies of 10% or above are required to be taken into account when assessing whether RPDT profits fall within the £25m allowance.
So, as an example, there could be a situation where a developer group has a pre interest / finance costs profit of £20m but also has a shareholding in a joint venture company where their share of the joint venture pre interest profits means they exceed the £25m allowance and brings part of its overall profits within the scope of the 4% RPDT.
Are there any exemptions regarding what is classed as ‘residential’?
The draft legislation includes a number of exemptions from the definition of “residential property”, such as for ‘communal dwellings’, i.e., hotels, supported housing providing care/support for vulnerable groups, accommodation for members of the armed forces, prisons, etc. Also exempt is purpose designed/adapted Student Accommodation, when it is wholly or mainly for those in education, and used by such persons for at least 165 days in a year.
The scope of the exemptions for not-for-profit entities to Residential Property Developer Tax is limited to not-for-profits that have a charitable purpose of providing affordable and social housing for example social landlords, housing associations and registered social providers.
Not-for-profit entities that develop residential property for the purposes of raising funds to further their charitable purposes will be within the charge to RPDT.
Taxable subsidiaries of not-for-profits will not be able to offset gift aid payments against profits chargeable to RPDT, as they can against corporation tax.
The exclusion for care homes and other housing for the elderly extends only to such facilities that include personal care. Retirement villages and other housing for the elderly that do not include personal care are currently within the charge to RPDT.
Calculating profit and group companies
Administratively, RPDT is now to align with the corporation tax rules and is, in effect, akin to a 4% corporation tax surcharge on the trading profits of residential developments. This will mean an overall tax rate of 29% for those residential developers who fall within the scope.
The administrative arrangements for the allocation of the allowance between group companies subject to RPDT will work in a similar manner to the Corporate Interest Restriction allowance procedure, including electing a nominated company and the preparation of an allowance allocation statement.
No deduction allowed for interest
The most noteworthy computational rule is that no deduction is allowed for any interest or other finance costs e.g. arrangement fees. The loss of interest deductions together with climbing interest rates is going to be a significant factor.
Group relief and internally generated losses may be accessed to the extent that they also relate to RPDT-able activities although there are a number of restrictions that could serve to defer the utilisation of carried forward losses against RPDT profits in later periods.
Whilst RPDT is aimed at developers with profits over £25m, it is vital that residential development companies with significant profit expectations adjust their forecasts to take into account the new rules. This is especially key where joint venture interests are involved – RPDT could significantly adjust expected post tax profits.
The exclusion of build to rent activities has substantially reduced the population of businesses that will pay RPDT, although the wide range of assets and development activities within the scope, and the exclusion of relief for finance costs may lead to more businesses being affected than might initially have been expected.
Some of the computational aspects of the tax including the calculation of the developer’s allowance are complex.
The information was correct at time of publishing but may now be out of date.