The UK Government has now published draft legislation for the new tax on companies carrying out residential property development in the UK, Residential Property Developer Tax (RPDT). RPDT will be a UK wide corporation tax charge applied from 1 April 2022.
As we reported in our earlier article outlining the proposals, RPDT is intended to help fund the package of measures designed to bring an end to unsafe cladding. The aim is to raise at least £2bn over a ten-year period but so far, there is no end date in the draft legislation.
The draft legislation reflects some of the initial proposals but introduces some changes.
The draft legislation
- The properties
As originally proposed the legislation will cast a wide net and catch an extensive range of "residential property". As you would expect, houses, flats and buildings used or "suitable for use as dwellings", will be affected but so will undeveloped land with planning permission for construction of residential property and existing buildings being adapted for residential use.
In terms of the draft legislation, purpose-built student accommodation occupied by students for at least 165 days a year will not be subject to RPDT, but this is up for discussion in the latest consultation. Other communal dwellings such as residential homes for children or the elderly and supported accommodation with care and support are specifically excluded and it has also now been confirmed that build to rent accommodation will be not subject to the tax.
- The payers
RPDT will be payable by residential property developers who pay corporation tax and carry out residential property development activities in the UK. This will include mixed use developers whose business is not solely residential development. The developer (or a related party) will have to hold "an interest in the land" at some point to be caught. This is widely defined to include interests in land held as trading stock but will not include a licence to occupy or use the land or a security. Companies acting as third party contractors will not be subject to RPDT.
"Residential property development activities" is also widely defined to cover all stages of the process, not only building properties for sale or rent, but also sale of partially completed dwellings for example at "golden brick", conversion of property to residential use, and sale of land with planning permission even where no homes are built. It will also cover the marketing and managing of residential property.
Following calls from the BPF and others that it would be disproportionate and unfair to include BTR within the scope of the new tax, it has been confirmed that 'Although Ministers still consider a valid argument can be made for profits from BTR activity being subject to the new tax as a form of residential property development activity, they have decided that BTR activity should not be in scope of the tax at this point in time'.
It has also been confirmed that there will be an exemption for non-profit affordable housing providers, including their for-profit subsidiaries.
Property development outside the UK will not be caught, but development carried out by a non-UK company will be caught where profits are within the charge to UK tax
- The profits
The proposals had suggested that RPDT would only apply where profits from residential property development activities exceeded £25m per annum. The draft legislation speaks of an "allowance" before which tax will not be charged but does not stipulate what that "allowance will be. The amount of the allowance will be announced at the Autumn Budget on 27 October 2021.
Whatever the allowance will be, it will apply on a group wide basis. There is also provision for taxing joint ventures where the residential developer holds at least a 10% interest.
The first consultation on the proposed new tax had asked for views on whether the profits to be taxed should be calculated by using either:
- a company-based approach, taking account of all profits of a company or group which had "significant" profits from residential property development; or
- an activity-based approach, taking account of only profits actually arising from residential property development.
The government has decided that the profits calculation will be done using an activity-based approach meaning that profits from other activities not related to residential development will not be subject to RPDT. There will be no deduction for interest and group relief in arriving at profits subject to RPDT
The tax will apply to profits arising in accounting periods on or after 1 April 2022 and will be treated as an amount of corporation tax. There are anti-forestalling measures that will apply from 29 April 2021 to counter attempts to accelerate profits so that they arise before the tax is introduced.
- The rate of tax
Again, the big unanswered question is what the rate of RPDT will be. The proposed rate will be made public in the Autumn Budget on 27 October 2021.
The technical consultation
The second consultation on the new tax looking at the technicalities of the draft legislation closed on 15 October 2021. The responses to the consultation will be considered and the final version of the legislation published with or shortly after the Autumn Budget.
While it is worth bearing in mind that the finer details of the RPDT could change, housebuilders and all those involved in residential development activities should bear the introduction of RPDT in mind when negotiating new land deals and in modelling for current development projects. They should also consider how existing group structures and joint venture arrangements may be affected by the new tax.
Contact your Brodies contact if you would like to discuss the implications of RPDT for you and your business.