The “cladding tax”: the government’s consultation on the Residential Property Developer Tax

United Kingdom

Earlier this year, the government announced its plan to introduce a new Residential Property Developer Tax (the “RPDT”). Colloquially also known as the “cladding tax”, the tax’s stated aim is to help fund remediation works for unsafe cladding on high rise residential buildings, a major part of the government’s Building Safety Package developed in light of the tragic fire at Grenfell in 2017. The consultation document released on 29 April 2021 contains detail on the current proposals for the design of the tax.

While the rate has not yet been set, the government’s objective is to raise at least £2 billion over the decade following the planned introduction of the tax in 2022.  

Scope

Only the “largest” corporate property developers are intended to be affected. As such, companies and corporate groups will be within scope if they:

  • undertake UK residential property development activities; and

  • generate profits in an accounting period which exceed an annual RPDT tax-free allowance of £25 million.

The meaning of “residential property development”

The definition of “residential” will build upon the “essential element” of the definition for other property-related taxes, to mean:

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

As is the case for Stamp Duty Land Tax, it is proposed that the definition will also extend to land and property under development or undergoing a change of use, and will also explicitly include such land for which planning permission to construct residential property has been obtained.

While there are likely to be carve-outs for “communal dwellings” such as:

  • hotels;

  • residential care homes;

  • supported housing for those with disabilities and vulnerabilities;

  • accommodation for members of the armed forces; and

  • prisons,

it is apparent that the definition of “residential” is intended to be broad.

The consultation makes clear that at present, the inclusion of:

  • build-to-rent;

  • purpose-built student accommodation (“PBSA”);

  • semi-assisted retirement living; and

  • affordable housing

are under consideration, with build-to-rent the most likely to be included at this stage. In light of this, concerns have been raised that the RPDT will cause a “dry” tax charge to arise, since the profit from a build-to-rent activity will be considered (for RPDT purposes) to be:

  • the notional profit on an arm’s length sale, where the property is transferred intragroup on completion; or

  • in the absence of such transfer, the fair value of the property on initial rental, less development costs.

The government is specifically inviting views on student accommodation, at present indicating that PBSA which provides the three basic amenities (kitchen, bathroom, toilet) in a single self-contained unit could be included, while traditional halls of residence with shared amenities could be out-of-scope. Further consideration also needs to be given to the (often very fine) distinction between residential care homes and supported retirement living, which can include a significant element of caregiving.

Taxing model

Two taxing models are currently being proposed:

  • Model 1 would apply the tax to the total (including commercial) profits of companies or corporate groups which undertake a “more-than-insignificant” amount of residential development work, or support that work.

  • Model 2 would again apply to any company that undertakes residential development work, but crucially will only tax the company’s profits to the extent they relate to residential development work.

Clearly less profits will be in scope in Model 2, but, for some corporates, this may be outweighed by the administrative burden of determining which profits “relate” to residential development work.

Importantly, group relief, carry-forward of losses, and relief for interest and other funding costs are not currently intended to be factored into the computation of profit for RPDT purposes. In line with the government’s statement that the RPDT is not about allocating blame or responsibility in relation to cladding defects, no relief or exclusions are mentioned for developers who have already paid for remediation works (or for those whose developments needed no remediation).

Going forward

The government’s plans are taking shape and clearly the intention to introduce the tax in 2022 remains strong. It remains to be seen how the government will react to concerns and criticisms surrounding certain elements of the plan as laid out in the current consultation, specifically those concerning which types of “residential” development are in scope, and the inclusion of properties built to rent.