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Potential Residential Property Developer Tax on the horizon

13th July 2021

Since the Grenfell Tower disaster of June 2017, successive governments have struggled to develop an effective plan to deal with the many buildings in the UK which feature the same kind of highly flammable cladding.

In June 2020, a report published by the Housing, Communities and Local Government Committee (HCLGC) produced an estimate which stated that the cost of fixing ‘all serious fire safety defects’ in high risk residential buildings could amount to as much as £15bn.

The government has faced pressure from a number of sources, including thousands of leaseholders facing ruinous bills for replacing the dangerous cladding on their building.

The government response to the pressure was to announce a new fund in February 2021, which pledged £3.5 billion in cash grants for cladding remediation, and loans offered to those living in affected blocks under 18 metres high.

This announcement was greeted with some dismay by Tory backbenchers, 40 of whom signed an amendment asking for freeholders to be barred from passing the cost of removing cladding or other fire safety work on to leaseholders.

Consultation on radical change to funding

The latest suggestion from the government to deal with paying for cladding remediation, takes the form of a consultation document on the introduction of a Residential Property Developer Tax (RPDT) on corporations.

The consultation period was launched by HMRC on 29th April 2021, and will run until 22nd July 2021. As outlined in the document, the RPDT is intended to be time limited and designed to raise a minimum of £2 billion over a decade.

The document states that this amount represents a “fair contribution” to the overall cost of the cladding remediation programme, and that it will be targeted at the “largest corporate undertakings that make money from UK residential property development activities”.

When will Residential Property Developer Tax come into force?

Although many details of the RPDT, including the rate at which it will actually be set, have yet to be established prior to the consultation, there are some details in place:

  • The RDPT will be levied from 1st April 2022
  • The tax will focus on the development of residential properties in the UK, whether built for sale or rent
  • The definition of residential property for the purposes of the tax will cover not only houses and flats, but also buildings deemed “suitable for use” as dwellings. Undeveloped land with the benefit of planning permission to build residential property will also be covered. It is undecided whether student accommodation will be included.
  • HMRC are assessing two different models:

 Model 1 – all of a company’s profits, including those from commercial property development will be taxed, if that company’s activities included a more than “insignificant” amount of residential property development. The threshold for what represents an “insignificant” amount has yet to be determined.

Model 2 – the tax would be payable by any company which undertakes UK residential    property development, but would only apply to profits directly generated by residential property development.

  • Developers cannot reduce the amount of RDPT due through the use of losses, group relief or funding costs from pre-April 2022, which is intended to ‘ring fence’ the residential property development profits.
  • RDPT will only be payable by businesses reporting a group-wide annual profit exceeding an allowance of £25 million over a 12 month period. It is proposed that only profits over this £25 million allowance will be subject to RDPT.
  • The application of RDPT will only last for a decade, with the possibility that it could be extended for a longer period if it raises insufficient revenue over that period.
  • Joint venture enterprises are also impacted by RPDT if they have ‘relatively significant economic interest’ in a vehicle liable to the new tax.

The consultation ends on 22 July 2021, and so those engaged in residential property development in the UK should have their say now, and ensure they help determine how any RPDT might affect their activities in the future.

If you have any concerns or questions regarding the RPDT please contact Jonathan Rowley of the Commercial Property team here at Ansons on 0121 716 3716 or by email at jrowley@ansonssolicitors.com

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