New Residential Property Developer Tax
HMRC has announced a new Residential Property Developer Tax (RPDT), aimed at large property developers which will apply to both development to sell and development to hold activity.
The proposed Residential Property Developer Tax is to be introduced on 1 April 2022 (through inclusion in the 2021 Autumn Finance Bill) as part of a package of proposals to raise revenue for remediation work to unsafe cladding on high-rise residential buildings, subsequent to the Grenfell tragedy in June 2017.
Housing Secretary Robert Jenrick has said: “We’re making the biggest improvements to building safety standards in a generation …. ensuring the industry is held to account for the wrongs of the past. This tax will strike the right balance between developers making a contribution and ensuring fairness for the taxpayer.”
The Government aims to raise at least £2 billion over a decade with the introduction of this tax.
Which developments will be taxable?
Residential Property Developer Tax will apply to profits derived from UK residential property only.
To come within the scope of the RPDT the taxpayer must be developing, and this will include: building a new residential property and converting an existing property to residential.
Residential Property Developer Tax seeks to tax both build–to–sell and build–to–hold with a requirement to measure profits derived from the development phase on the build–to–hold. This would lead to “dry tax charges” – meaning tax on proceeds not received.
Hotels, care homes, prisons and charitable housing associations will be excluded but comments are being sought on how the tax will apply to student accommodation and retirement schemes that offer less care functions.
Affordable housing is in scope, but the consultation document suggests that such accommodation is developed at cost, not at profit.
The proposed rules will apply irrespective of the tax residence of the corporate developer.
Residential Property Developer Tax to apply to the largest developers only
RPDT will apply to profits as calculated for the purpose of RPDT in excess of £25 million for a 12-month period.
Financial secretary to the Treasury Jesse Norman said: “Given the significant costs associated with the removal of unsafe cladding, it is right to seek a fair contribution from the largest developers in the residential property development sector to help fund it.”
How will the RPDT be applied?
The tax will apply from 1 April 2022. Whilst the consultation does not announce the rate of tax, the Government say this will be ‘proportionate’, taking into account the proposed 25% rate of corporation tax coming in from 2023.
The Government is looking at two alternative ‘models’ of taxation.
Model 1 would tax companies on all of their profits, subject to a de minimis of development activity.
This would mean profits from other activities of the company such as commercial property development or on the full profits of a mixed development would be subject to RPDT. The impact of this approach of taxing the company rather than the activity would depend upon how a group is structured and whether the company in question does more than residential property development.
Model 2 in contrast is targeted at taxing profits from UK residential property development activity only. It would apply to companies or groups of companies that undertake that activity or support others in the same group doing that work. As only UK residential property development activities would be subject to the RPDT, this would require identifying those activities within a company. For example, on a mixed-use development only residential profits would be taxable.
In either case, no relief is to be given for financing costs including interest and there will also be restrictions on relief for losses.
What are the implications?
The wide range of assets within scope, particularly assets held for letting, and the exclusion of relief for finance costs may lead to more businesses being in scope than initially expected. Further, given that property development typically produces assets in phases, it is possible that developments could be unexpectedly brought within the charge of RDPT.
According to some market participants, this could impact the overall delivery of new homes and amplify the housing deficit although the Government says that the tax will be set so that it does not disproportionally impact housing supply.
As the tax is aimed at residential developers with profits over £25m, arguably, this might allow smaller developers a better chance to compete in the market.
What is next?
It is clear that the proposed tax will have varying effects on different sectors and types of developer.
There is currently a lack of uncertainty on how the proposed changes will work and it is expected this things will become clearer once the consultation has ended on 22 July.
In the meantime, property developers should consider how they might be affected by the RPDT, albeit based on the limited information available.
The full Government consultation document on RPDT can be found here.
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Get in touch with our Head Office in Bolton, Greater Manchester, for any financial advice or questions regarding the new Residential Property Developer Tax on 01204 414 243.
The information was correct at time of publishing but may now be out of date.