Autumn budget 2021: rate of residential property developer tax announced

Out-Law News | 29 Oct 2021 | 9:53 am | 3 min. read

A new tax on residential property developers will apply from April 2022 at a rate of 4% on annual profits from residential developments exceeding £25 million.

The government announced the rate in its autumn budget. The tax is intended to contribute to government costs in relation to the removal of unsafe cladding following the Grenfell Tower disaster.

In September the government launched a consultation on the draft legislation to introduce the new tax and confirmed that student accommodation would be excluded from the tax. Earlier this month it confirmed that build-to-rent (BTR) developments would not be included.

The Treasury has now published a response to its initial consultation on the design of the new tax, which ran until July. The consultation response gives details of the reasons behind some of the policy decisions.

Residential property developer tax (RPDT) will be largely based on trading profits from residential development as computed for corporation tax purposes, but interest and other funding costs will not be deductible in the calculation of the tax. The government said that this is necessary to prevent distortions of the tax base due to different funding models.

According to the consultation response document, although the government has decided that BTR activity should not be subject to the new tax “at this point in time”, the decision will be kept under review. Applying RPDT to BTR would have been complex because a BTR developer retains the property rather than selling it and so a deemed development profit would have to be assessed which would be complex and would result in a ‘dry’ tax charge on unrealised profit, it said.

“It does not appear to be the intention that BTR be defined in the legislation – rather the fact that BTR developments are typically held as investments by companies will mean the tax does not apply to them,” said Richard Croker, a property tax expert at Pinsent Masons, the law firm behind Out-Law.

Tax exempt non-profit registered providers of affordable housing and their wholly owned subsidiaries will be exempt from the scope of RPDT. Although there had been calls for an exemption for all registered providers of affordable housing, the government said that an exemption for the development of affordable housing with a view to making a profit was not justified.

“Any entity liable to corporation tax which holds its residential land interests as trading stock could be within the scope of RPDT,” Croker said.

“There does not appear to be any special treatment for shared ownership homes, for example, so if profits from first tranche sales are treated as trading profits they will be within the new tax if the developer is not tax exempt,” he said.

Care homes will be excluded from the scope of RPDT. However, the government has resisted calls to extend the exemption to extra care housing and housing with support on the basis that these are more akin to mainstream residential dwellings and any exemption could introduce distortions between competing retirement models in the market.

Hotels and specialist purpose-built communal housing will be excluded from the definition of residential property. The government intends to expand the definition originally proposed to include premises providing temporary sheltered accommodation such as emergency shelters and respite care, as well as on-site and residential accommodation for members of the emergency services.

Although the tax is intended to be time-limited and to raise at least £2 billion over a decade, the government does not consider a ‘sunset provision’, which would repeal the tax at a fixed point, to be appropriate. Instead, it said that the tax will be repealed once sufficient revenue has been raised.

Any tax due will be reported and paid as part of the company’s corporation tax return.  The existing corporation tax quarterly instalment payment rules will apply to the tax, although transitional arrangements will mean that that the first RPDT payment will not be due until the first quarterly instalment payment after commencement of the tax on 1 April 2021.

The government has decided not to proceed with a proposal to allow a nominated company to report and pay RPDT on behalf of the whole group. Instead, RPDT will be included within any group payment arrangements for corporation tax.

Losses incurred before the introduction of the tax will not be capable of reducing RPDT profits. However, it will be possible to offset post-commencement carried-forward RPDT losses and group relief from ring-fenced RPDT activities against RPDT profits. As with corporation tax for large businesses, though, there will be a 50% restriction on loses carried forward.

Where a joint venture is a corporate body then RPDT will apply at the joint venture level. Those holding interests in the joint venture will not be subject to the RPDT on their share of profits of a joint venture, to the extent that those profits have been subject to the tax at joint venture level. The legislation will apportion the £25m annual allowance to those holding an interest of 10% or more in a joint venture.  The government will not seek to tax profits of joint venture members that are outside the scope of UK corporation tax or are UK tax exempt, but there will be a mechanism for adjusting the £25m annual allowance in these circumstances.

The latest version of the legislation will be published on 4 November as part of the Finance Bill.