Residential Property Developer Tax – What you need to know

The Government has residential property developers in its sights. The new Residential Property Developer Tax (RPDT) will be enacted in Finance Bill 2022 and will be effective from 1 April 2022. The RPDT is part of the Government’s strategy for recuperating the costs of the ‘cladding scandal’, which has largely been borne by the Government rather than developers. The stated aim is to raise £2bn over the next decade. The draft legislation, however, does not include a sunset clause, which is slightly alarming as Governments can grow accustomed to new sources of revenue.

The scope of RPDT

Broadly, companies that are subject to UK corporation tax and carry out UK residential property development (RPD) activities will be subject to RPDT at a rate of 4% on RPD profits in excess of an annual allowance (AA) of £25 million per year. 

To be within scope, a developer must have, or have had, an interest in UK land in connection with which RPD activities are being carried out. The land must also be held by the developer as trading stock. RPD activities include dealing in residential property, designing, seeking planning consent, construction, and any ancillary services.

The Government has fortunately excluded Build-to-Rent (BTR) developers from RPDT. The exclusion is on the fundamental basis that the property must be held as “trading stock” to be within scope. The primary reason for the exclusion seems to be centred around administrative challenges and the impact on BTR developers that do not realise profits on completion of a development but over a longer timeframe. The Government’s consultation response, however, stipulates that the decision to exclude BTR developers will be kept under review.

Also excluded are “non-profit housing companies”, which will include non-profit registered social housing landlords and their trading subsidiaries.  This will be welcome relief for the not-for-profit housing sector.

Purpose-built student accommodation and care homes have also been excluded, but this has not been extended to the retirement living sector, nor to affordable housing.

Surprisingly, land on which planning permission is being sought for residential development is also within the definition of ‘residential property’ for the purposes of RPDT, bringing land promoters within the scope of RPDT.

Calculation of RPD profits

The RPDT is being incorporated within the UK corporation tax regime, with any tax due reflected within the company’s corporation tax return. A company will only be subject to RPDT on profits attributable to RPD activities, which are then subject to prescribed adjustments.

Although RPDT will only apply to RPD profits in excess of an AA of £25m, the tax is expected to have a broader reach than many may initially anticipate.

• The AA will apply on a group-wide basis and it cannot be carried-forward or carried-back where it is unutilised in an accounting period.
• No deductions for financing costs are permitted in calculating RDP profits. This seems particularly onerous for a sector that is traditionally reliant on third-party finance to undertake large scale construction activity.
• There won’t be any ‘grandfathering’ for developments that were initiated before the RPDT was announced. In addition, deductions are not permissible for losses brought-forward from before April 2022.
• Relief for post-April 2022 losses will be restricted.

For most build-to-sell developers, who realise profits once the development is completed after several years of construction, this regime will significantly increase their profits against which tax will be assessed.

A complication will exist for relevant joint venture companies (RJVCs) under which the RPDT is expected to apply at the RJVC-level but with modifications for the calculation of AA and the use of losses from the RJVC members.

Interestingly, RPDT should not apply to the disposal of shares in “property-rich” companies that hold property as trading stock. This is in contrast to the Non-Resident Capital Gains Tax (NRCGT) rules, which do provide for UK taxation on indirect disposals of UK real estate. For corporate transactions, developers should consider whether or not UK tax on latent RPD profits should factor into price negotiations.  

There is some ambiguity about the treatment of overage receipts from slice-of-the-action contracts, which can be treated as trading income under the UK Transaction in UK Land (TIL) rules. HMRC is expected to clarify this through guidance and/or changes to the draft legislation in the coming months.

Conclusions

The RPDT is yet another stage in the ongoing evolution of the taxation of UK real estate. There remain some uncertainties, but the fundamental principles of the tax now appear to have been agreed. Developers should begin preparatory work to establish the potential application of the RPDT to their business. Smith & Williamson can help taxpayers navigate this new regime.

Ref: NTAJ141121104

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.