Following the tragic events at Grenfell Tower in June 2017, the UK Government signalled its intention to end the unsafe cladding of highrise residential buildings, providing funding of over £5b to date, towards the cost of replacing such cladding. 

As part of these efforts, on 10 February 2021, the Ministry of Communities and Local Government set out its plan to bring an end to unsafe cladding, provide reassurance to homeowners and support confidence in the housing market: 

• The Government will pay for the removal of unsafe cladding for leaseholders in all residential buildings 18 metres (six storeys) and over in England; 
• A finance scheme for leaseholders in lower rise, lower-risk buildings – those between 11 and 18 metres (four to six storeys) – to help pay for cladding removal where it is needed and ensure leaseholders never pay more than £50 a month towards the costs;
• A new building safety regime to ensure a tragedy like Grenfell never happens again.

Funding the policies

With these measures funded via a new industry levy (the Gateway 2 Developer Levy) and a new tax on residential developers, with the goal of ensuring that developers “play their part and make a fair contribution”.

On 29 April 2021, HM Treasury released a consultation on the second of these two revenue-raising measures, a new Residential Property Developer Tax (RPDT). This tax is set to apply from April 2022, with the policy goal of raising approximately £2b over the course of a decade. 

Importantly, the new tax is currently proposed to target not only developers who have had cladding issues themselves and those developing highrise buildings (although the new industry levy will), but all residential property developers over a certain size. 

In the consultation, the Government says that the largest residential developers are operating in a market that benefits from the substantial amount of funding the government is providing to address building safety defects. The Government has also helped support confidence and liquidity in the residential property market with its recent interventions on stamp duty land tax and the mortgage guarantee scheme. Therefore, the Government considers it is right to seek a fair contribution from the largest developers in the residential property sector towards these costs. In practice, however, the tax may have a wider net than expected, for reasons we discuss below. 

The consultation on RPDT ends on 22 July 2021. BDO LLP will, of course, be responding. However, the consultation document is, at present, silent on several key characteristics of this new tax. Most notably, the rate of tax applicable under RPDT has not yet been determined. 

The scope of RPDT

RPDT targets the profits of UK residential development activities and has a broad scope, covering the development of ‘dwellings’ for both ‘build to sell’ and ‘build to rent’. The specific definition of ‘development’ is not clearly defined in the consultation when it comes to existing buildings. The consultation does state that conversions of existing buildings to residential premises will be within the scope of the new tax. Although it is unclear whether the re-development of existing residential premises could also be subject to RPDT, it is assumed that the legislation will be drafted so as to capture such activity.

The consultation document includes a number of carve outs and potential carve outs from the definition of ‘dwellings’, these include the common exclusions for ‘communal dwellings’, such as hotels, supported housing providing care/support for vulnerable groups, accommodation for members of the armed forces, prisons, etc. In setting out these carve outs, HM Treasury also provided some direction on its thinking in several key areas:

• Build-to-rent – Importantly, build-to-rent appears to be within the charge – with a suggestion that profits from this activity for RPDT purposes will be determined based on a notional market value calculation upon initial rental of a completed property. If introduced in this way, this will therefore introduce a ‘dry tax charge’ for build-to-rent developers. This is, therefore, a tax that spans both conventional development activities and would apply to companies that hold stock on their balance sheet but as well as entities that would hold property as fixed asset investments. It would be a departure from established principles to tax unrealised and uncrystallised gains.

• Student accommodation – Consideration is being given to the extent to which student accommodation falls within the scope of RPDT and it is possible some or all student accommodation being developed will fall within the charge to RPDT. From the consultation document wording, HM Treasury is likely to draw a distinction between the more traditional halls-style accommodation and more modern flats (self-contained or cluster) with the former more likely to be left out of the provisions;

• Affordable housing – It is anticipated the profits from the development of affordable housing would fall within the scope of RPDT (HM Treasury does not view this as contrary to the UK Government’s goal to increase the availability of affordable housing). The Consultation notes that the anticipation is that such development is typically either undertaken at cost due to s106 planning obligations or by charitable or otherwise tax exempt organisations (with there being no intention to disturb the existing tax exemptions for charitable activities). However, HM Treasury does recognise that some affordable housing is developed on a for-profit basis and welcomes views on the implications of taxing profits from such activity.

• Care homes and assisted living – While the development of residential and supported housing is specifically outside the scope of RPDT, HM Treasury has left open the option of including the development of retirement housing that is not reliant on care provision within RPDT. This appears to be a significant over-simplification of this sector and would create uncertainties where a spectrum of services are provided.

• Entities within the charge – Charities that fall under the remit of the RPDT will not be subject to the tax. However, HM Treasury is yet to confirm whether other entities, such as pension funds and local authorities, will be subject to any charge.

Who will pay RPDT?

The Government intends that only the ‘largest’ residential property developers will be brought within the charge to RPDT and would capture residential development profits from UK properties in both UK and non-UK resident companies.

RPDT will be charged on profits from residential property development activities subject to an allowance of £25m per group (the definition of group has not yet been decided). This £25m allowance cannot be carried forward to future periods.

There are two proposed methods under discussion for companies to calculate their liability to RPDT: 

• Tax all profits of a company which directly undertakes or contributes to a group UK residential property development activities (unless ‘insignificant’) or;
• Tax just the relevant residential property development profits of a group. 

Interestingly, no interest or funding costs will be available as an RPDT deduction (this appears to apply to third-party bank interest as well as intragroup debt).Therefore, in practical terms, the £25m annual allowance may be much less generous than it initially appears – expanding the scope of RPDT beyond the ‘largest’ developers due to the proportionally lower financing costs of the largest residential developers in comparison to the residential development sector as a whole. Further, in scenarios where a property/properties have been retained for a number of years, and as a result the financing cost has reduced the accounting profits, the rate of RPDT will become disproportionality high. 

What will the rate of RPDT be? 

With the rate of UK corporation tax rising to 25% from 1 April 2023 and the Gateway Developer 2 Levy on the way, there is intense interest in what the rate of RPDT will be. While a rate has yet to be suggested, the Government has set a target for RPDT to raise £200m a year. Clearly, if the RPDT tax net is spread wide and covers a yearly tax base of £10b, the rate would only have to be 2%. If it is much more focused, then the rate would have to be higher (for example, 5% for a tax base of £4b). 

The RPDT is in the early stages of development, but it has been trialled for some time and is being introduced in relatively short order. It is difficult to reach firm conclusions as to its specific implications until the results of the consultation are published (expected to be later this year). However, it is already clear that the provisions are likely to add additional complexity and consequent costs to the UK residential sector.