Meg Saksida considers where the impact of the proposed residential property development tax will be felt.
The Grenfell Tower tragedy was horrific, and the disaster forced the government to prioritise the end of unsafe cladding.
However, the government did not wish the tenants of such properties to bear the ultimate cost of the remedial work that landlords will be required to make following the secretary of state’s five-point plan to abolish this type of cladding. Instead, the government wished the building industry as a whole to contribute; to this end, a two-pronged approach to raise the finance was suggested. The first is the new ‘Gateway 2’ levy. This will be payable by developers when requesting planning permission for certain high-rise developments. The second is a proposed residential property developer tax (RPDT).
The possibility of this new RPDT was announced on 10 February 2021, and early calculations suggest that it could raise at least £2 billion over the next ten years. HMRC published the consultation document at the end of April 2021.
The taxpayers, the allowance and the rate
The proposed tax will only be for a limited period of ten years, rather than an ongoing tax.
Individuals and small builders will generally not be subject to the tax. This is because there is a £25 million annual allowance, below which the charge would not apply. Therefore, only large-scale builders will be liable, and if the company’s activities are wholly unconnected to residential development in the UK, they will also be outside the scope.
The rate of RPDT has not been confirmed to date and will be subject to further consultation, but the government has stated that it will be proportionate and will be considered in the context of a 25% corporation tax rate and the fact that they wish it to yield at least £2 billion in the decade that it will be charged.
The tax will be calculated on the proportion of the profit made by the builder on UK residential developments constructed for sale or rental (so leasehold, freehold and commonhold interests). Build-to-rent developments, whether undertaken through a company on their own, through a group, or through a joint venture with other investors, will be included. Profits taxed will include those on completed dwellings but also on sales of partially completed sites and residential building sites alone.
‘Residential property’
The definition of residential property is slightly different for all the UK taxes for which it is used (capital gains tax (CGT), ATED, SDLT, NRCGT). The definition that will be used for the RPDT will be:
‘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.’
This definition is extended for developers, to include: buildings that are suitable to be used as dwellings but are not being currently used as such; any building being adapted or restored for domestic use; and undeveloped land on which a dwelling is being or will be built. The definition will include affordable housing, so social rented housing, shared ownership, and first home schemes will all be ‘residential property’. However, some communal dwellings will be exempt on the basis that they will not obtain any benefit from the government’s funding. Examples of these are hotels, hospitals, boarding schools and prisons.
How the tax is calculated
The tax is designed to apply to profits made from the development of UK residential property, and if this is all the entity does, the tax will be straightforward to calculate.
However, if the developer has more than one activity (e.g., developing both residential and commercial properties), the profits will need to be apportioned for the correct calculation of the RPDT. There are currently two apportionment models suggested in the government’s consultation document.
1. The company based approach
For this model, tax is charged on the profits of the development company or companies. Where there is a group, only the companies within the group that directly perform (or contribute to) the group’s UK residential property development activities would be chargeable.
Of course, there are degrees of company involvement; so if a company does contribute or perform some activities but these are insignificant, being under a de-minimis percentage of profit or turnover (to be determined), their profits would not be included.
This gives two separate types of company in the group; those who have significant company development activities (for whom all their profits would be included in the calculation of the tax), and those with insignificant UK residential development activities (for whom none of their profits would be).
The consultation document gives an example of a group with both a residential property development company and a commercial property development company. The commercial property development company also gives support to the residential property company. If this support was not deemed to be insignificant, all the profits of both the residential property development company and the commercial property development company would be included in the tax base. If the support was insignificant, only the profits of the residential property company would be, and none of the commercial property company.
Profits are defined as the total profits as computed for corporation tax, and the RPDT would be applied to the profits of those companies without insignificant support in full.
2. The activity-based approach
For this model, tax is charged on the development activities inside the company or companies. Where there is a group, only the profits on the UK residential property activities generated in the companies inside the group will be subject to the RPDT.
Unlike the company model, it is not an ‘all or nothing’ application, but a model that taxes only the UK residential development activity profits inside any company generating such profits. There would therefore be no need for establishing the significance of intercompany support in this model.
To accurately calculate the PRDT, the profits from a UK residential development company will need to be extracted. The total profits as computed for corporation tax purposes will be the starting point, and then adjustments will be required to be made, to leave only the profits that relate to the residential property development activity.
Territorial scope
The tax is only for companies making profits from UK residential development, whether these profits are generated in the UK or whether the company is non-UK resident, but the UK exercises its taxing rights under a double tax treaty.
If the UK has no taxing rights, the profits will not fall into the scope of the RPDT.
Practical tip
The RPDT should not affect individual taxpayers unless they are making profits from UK residential development of over £25 million. However, the knock-on effect of companies being required to pay this additional tax may impact the supply of housing and, therefore, have an indirect impact on the public.
