Highlights of the proposed Residential Property Developer Tax

At the end of April, HMRC released a consultation for the introduction of the Residential Property Developer Tax (RPDT). The RPDT is being introduced as part of the Government’s Building Safety Package, designed to address unsafe practices in the housing sector in the wake of the Grenfell Tower disaster.

The Government intends for this to be a time-limited tax, applying only to the largest companies involved in UK residential property development activities. Another measure, known as the Gateway 2 Levy, will also be introduced, and is intended to be applied when developers seek permission to develop certain high-rise buildings in England.

Defining residential property and development activities

Residential property will be defined in line with existing legislation such as for Stamp Duty Land Tax (SDLT). This is expected to mean a building that is constructed, or suitable for use, as a dwelling. However, some exclusions and extensions are expected. Among the exclusions are hotels, hospitals, and prisons, plus student accommodation and retirement living.

RPDT is intended to apply to companies that undertake UK residential property development activities. Territorially, the tax will be limited to include only residential developments undertaken in the UK.

It is the property developer that is subject to RPDT. A third-party contractor who undertakes development activities in relation to a UK residential property for the benefit of the developer will not be in scope. RPDT is also expected to apply to those developers building residential property for long-term investment where they intend to rent units on completion rather than sell.

How will RPDT profits be calculated?

Two models have been put forward for the design of the tax:

1. The company-based approach
2. The activity-based approach

Model 1 proposes that the total profits of a company that carries out ‘more than an insignificant amount’ of UK residential property development would be subject to RPDT. There is no proposed definition of ‘insignificant’ at this stage. While this model would be simple to administer, it could bring in activities not intended to be within the scope of RPDT.

Under Model 2, RPDT would only apply to the profits of a company (or group) that relate to UK residential property development. This would involve an additional administrative burden, requiring some form of division/segmentation of profits of the company (or group), but it would mean RPDT is payable on residential property activities only.

Under both models, the starting point is expected to be the total profits as calculated for UK corporation tax purposes subject to certain specific adjustments, such as interest & financing costs – these would not be permitted as a deduction in calculating RPDT profits – or losses. It is currently suggested that companies would not be permitted a deduction for losses accrued prior to the introduction of RPDT. In addition, it is not certain that the legislation will permit deductions for losses accruing after the introduction of RPDT.

Capital Allowances would not be available to residential property developers operating build-to-sell models, but they may still be available to developers building residential property for rental. The Government is also proposing to introduce targeted anti-avoidance legislation, including anti-forestalling rules, anti-fragmentation and re-characterisation rules.

What is the rate of RPDT?

The rate of RPDT has not yet been disclosed but it will apply in addition to UK corporation tax (CT). Only RPDT profits above an annual allowance of £25 million will be subject to RPDT. This would be a group-wide allowance and any unused allowance cannot be carried forward to future periods. The definition of a “group” is likely to follow existing legislation for corporation tax or consolidation principles for accounting purposes. This may result in some common-ownership structures having a separate annual allowance.

When will RPDT come into force?

The RPDT is expected to apply to companies with accounting periods ending on or after 1 April 2022. There is currently no indication that existing projects currently under development but expected to be realised after 1 April 2022 will be ‘grandfathered’ such that they would be exempt from RPDT. Therefore, RPDT is likely to represent an additional, unbudgeted cost to many residential properties currently under development.

It is proposed that RPDT could be reported through a company’s existing corporation tax returns, which would simplify reporting obligations. Consequently, the reportable periods for RPDT would also mirror CT and would follow the same reporting and payment deadlines.

How we can help

Smith & Williamson’s Real Estate Tax team can help you navigate the impact of the new rules when implemented and ensure that your RPDT position is modelled and optimised.

Ref: NTNPW062164

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.