The Residential Property Developer Tax (RPDT) is a corporation tax surcharge for residential property developer companies. It was first announced by the government in February 2021, and takes effect from 1 April 2022.

What is the purpose of RDPT?

The Government’s aim is to raise at least £2bn through RPDT over the next decade. It is part of efforts by the Government to recoup the £5bn it has committed to assist with the resolution of cladding and fire safety issues that have come to light since the Grenfell Tower tragedy.

Whilst RPDT is “not intended to imply responsibility on behalf of the payers for historic construction defects in relation to cladding”, it is seen by the Government as a “fair contribution” by large developers which, it believes, “are operating in a market that will benefit from the substantial amount of funding the Government is providing to address building safety defects” and from certain targeted interventions on SDLT and the mortgage guarantee scheme.

When will RPDT apply?

RPDT will be levied on the profits of companies carrying out activities in connection with the development of residential property. The scope of residential development activities for these purposes is very wide and includes dealing, designing, seeking planning permission, constructing or adapting, marketing or managing any UK land where the company (or a connected company) “has or had an interest in that land”.

The broad scope means a property trader who merely obtains planning permission to subsequently sell the land to a developer will be caught by the RPDT even though the trader realises his profit and sells the land before any development is carried out.

What is the tax rate?

RDPT will be charged at a rate of 4% on the “residential development profits” of a company. For relevant companies, this brings the effective corporation tax rate up to 23% from April 2022 and up to 29% from April 2023, when the main corporation tax rate is scheduled to increase to 25%.

Broadly, RPDT profits are calculated using the same principles that apply to UK corporation tax, with certain important exclusions, including:

  • profits or losses derived from activities outside the scope of the RPDT, including capital allowances or charges;
  • loss relief, group relief or carried forward loss relief from non-residential development activities; and
  • finance costs.

The exclusion of finance costs when calculating RPDT profits will further increase the effective tax rate for developers using debt finance.

Is there an allowance?

To reflect the aim that only the “largest developers” should be within the scope of RPDT, it will only apply to RDPT profits of a company (or group) that exceed an annual allowance of £25m. For these purposes a group consists of a parent company and their 75% subsidiaries.

This allowance is proportionately reduced for accounting periods shorter than 12 months and, in the case of a group, is automatically split equally between each group member unless specifically allocated by a nominated company.

How does RDPT apply to joint ventures?

RDPT will generally apply to a joint venture (JV) company (namely one that is not in a corporate group) as though it was an ordinary taxpayer.

The main difference from a JV company’s perspective is that the JV company’s annual allowance under the RPDT is reduced in certain cases. In broad terms, where a JV company is itself subject to RPDT because its profits exceed its annual allowance, its shareholders (JV partners) will not also be subject to RPDT on their share of the JV company’s profits. Where a JV company is not subject to RPDT because its profits fall below its annual allowance, its profits are allocated to its JV partners and included in the computation of its JV partners’ individual RPDT profits, and subject to each JV partner’s own annual allowance.

Allocating a JV company’s annual allowance

The application of the regime to JV companies is further complicated because in certain circumstances a JV company’s annual £25m allowance will be reduced. This will happen where a JV partner holds a “substantial interest” (at least 10%) in the JV company and is exempt from RPDT (e.g. a charity or pension fund). In this case the JV company’s annual £25m allowance is reduced by a percentage equal to the profit share percentage held by that partner.

For example, where a pension fund holds a 20% stake in a residential development JV company, the JV company’s annual allowance will be reduced from £25m to £20m. The pension fund has its own notional annual allowance of £25m which it can allocate between any relevant JV companies. In this example, if the pension fund has no other interests in residential development JV companies, it can allocate the 20% of its notional allowance needed to give the JV company the maximum £25m annual allowance.

Are there any exclusions to RPDT?

One of the biggest changes to the scope of RPDT originally proposed by the government is that RPDT will not apply to build-to-rent development (BTR). Originally it had been proposed that where a company develops a BTR building to hold as an investment, it would be subject to RPDT on the deemed profit realised at completion of the development. Fortunately this proposal was dropped, as it would have led to “dry” tax charges being suffered by this sector, and high levels of complexity in determining notional profits.

It should be noted, however, that where a BTR group uses one company to carry out developments and a separate company to hold and let completed developments (a common model in the sector), the first company may be subject to RPDT as it will be a developer for these purposes.

The development of hotels, hospitals, care homes which provide personal care and property used primarily as student accommodation are also excluded from the remit of the RPDT. For these purposes “student accommodation” means use by occupants wholly or mainly for undertaking a course of education and where it is “reasonable to expect” that such accommodation will be occupied by such occupants for at least 165 days a year.

RPDT applies to anyone carrying out residential development activities where they or a connected party have held an interest in the relevant land. The definition of “interest in land” is very broad, however it does exclude licences, so building contractors who might merely hold a licence to occupy the land they are working on should not be caught.