A consultation has been published regarding the new Residential Property Developer Tax (“RPDT“), which is being introduced as part of a package of proposals to raise revenue for remediation work to unsafe cladding on high-rise residential buildings. It is a lengthy consultation, setting out details for what looks to be a complex tax relative to the amount of revenue expected to be generated.
What you need to know about the proposed RPDT
The tax will target the profits of UK residential development activities, where annual profits exceed £25 million (determined on a group-wide basis, with special rules for JV structures). It is therefore only expected to impact the larger corporate residential property developers who are either: (1) UK resident; (2) non-UK resident but with a UK permanent establishment; or (3) non-UK resident and within scope of the offshore property developer rules.
It is a time-limited tax, aiming to raise revenue of at least £2 billion over 10 years, or c.£200 million per year.
The rate of the tax will be determined once the final design of the tax is clearer. The consultation seeks views on a number of aspects of the design and administration of the tax, including different models for identifying the tax base, but it envisages a tax on ring-fenced profits similar in style to the oil and gas supplementary charge in the North Sea. It is proposed that interest deductions will not be permitted in determining profits.
What counts as residential property for the purposes of the tax closely follows the SDLT definition, i.e. “a house or flat that is considered as a single residence, generally together with the grounds and garden or any other land intended for the benefit of the dwelling”. Where land and property are under development or undergoing a change of use, the definition will be extended, based on the SDLT rules, so will apply to profits made at earlier stages of development (e.g. sales at “golden brick” stage). Communal housing such as boarding houses, hotels, hospices and communal residential homes for the elderly will be excluded. The government is inviting views on whether accommodation such as student housing and retirement housing, when combined with care services should fall within the scope of the RPDT.
There will be a number of anti-avoidance measures included to prevent taxpayers trying to structure around the tax, including anti-forestalling measures, anti-fragmentation measures and measures which counteract step to reclassify residential property development profits.
Our initial thoughts
Whilst the annual allowances of £25 million will take many businesses out of the scope of the RPDT, it will still impact a significant number of taxpayers in the residential property sector.
What is perhaps most surprising about the proposals is the complexity of the proposed RPDT relative to the amount of tax expected to be generated (£200 million per year). As highlighted in the consultation, some features of the new regime appear similar to the North Sea oil and gas supplementary charge. This supplementary charge regime is acknowledged to be highly complex but such complexity was justified (at least initially) by the significant tax revenues it generated, which at its peak raised more tax annually than the RPDT is intended to raise over its entire life. In the case of the RPDT, we think there should be simpler ways to achieve the desired policy outcome without the excessive administrative burden.
Another feature of the proposed RPDT is that it would apply to build to rent developers by reference to deemed profits at the time of first letting. The suggestion is that this would reduce some complexity, but it would also seem to result in dry tax charges against the backdrop of what is already a very complex tax.
The full consultation is available here and runs until 22 July 2021 so there is plenty of time for interested parties to provide a response to the consultation. The tax is expected to take effect from 1 April 2022, to profits recognised in accounting periods ending on or after that date. Legislation will be included in the 2021-2022 Finance Bill.