Property Developers: a new tax

Gavin Birchall, Tax Partner, looks at proposals for a new tax which, if implemented, will have major consequences for residential property developers

13 October 2021 - Catherine Britton

The Government is set to introduce a new tax on residential property developer companies. This adds to the plethora of taxes which already affects such developers such as Stamp Duty Land Tax, VAT and corporation tax. The new tax (Residential Property Developers Tax or “RPDT”) will be a corporation tax charge imposed on profits of companies carrying out residential property development activities where the company:-

  • holds or has held a beneficial interest in the land being developed; and
  • the land represents trading stock in the hands of the company

A company will be deemed to hold a beneficial interest in the land if any related company (a related company will include a member of the same corporate group or a company which is connected by virtue of common interests in a joint venture company) holds such an interest in UK land.

Residential property development activities will include anything done by the developer in connection with UK land and buildings for the purposes of the development of residential property.  Consequently, the activities which are caught could include the obtaining of a residential planning permission, the conversion of commercial property into residential property as well as the development and sale of residential property.

There are a number of exclusions from the scope of the new charge. These include profits arising from the development of residential care homes or student accommodation. Not for profit housing companies or wholly owned subsidiaries of such companies will also be specifically excluded from the scope of the charge.

In determining the amount of residential property development profits which are attributable to a company, account will be taken of profits arising from a residential property development joint venture in which the developer has at least a 10% interest. In this scenario, the profits that would be available for distribution to the developer from the joint venture entity will form part of the company’s profits for the purposes of the RPDT.

The new RPDT will apply to profits arising in the accounting periods of companies ending on or after 1 April 2022. For accounting periods which straddle this date, the part of an accounting period arising before 1 April 2022 will be treated as a separate accounting period to the period from 1 April 2022 to the end of the actual accounting period. The RPDT will only apply to profits calculated for the later period and the profits will be apportioned to the later period on a time apportionment basis.

The Government’s stated aim of the new tax is to “ensure the largest developers make a fair contribution to help fund government cladding remediation costs”. To ensure that only the largest developers are targeted, the Government has proposed an allowance in which only residential developer profits above the allowance are subjected to tax. The amount of the allowance will not be known until the Budget on the 27 October. However, an allowance of £25 million per accounting period has previously been mooted.

There will be various specific rules to determine how this allowance should be applied to companies within a corporate group. For example, the general rule is likely to be that the allowance available to a residential property developer within a group will be £x (ie the headline allowance) divided by the number of companies that are members of the group at the end of an accounting period.

The rate of the new tax will not be known until 27 October, Budget day.  The Government is currently holding a technical consultation on the draft legislation which has already been published. This consultation period will end on the 15 October before the final design and rate of tax is announced on the 27 October.

Many residential property developers will therefore be waiting with trepidation as to the potential scope and cost of the new tax charge.

We recommend that you sign up to attend our Budget Breakfast event on 28 October to hear more about this and other tax changes the Chancellor will announce, which may affect you and your business.

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