Residential Property Developer Tax – a clearer picture emerges

United Kingdom

Further to its consultation earlier this year, the government has now released draft legislation for the residential property developer tax (“RPDT”).

The draft legislation does answer some key questions arising from the consultation, such as the model of the tax and the exclusion of profits arising from the development of purpose-built student accommodation (“PBSA”). However, other key areas remain outstanding, including:

  • the rate of the tax;

  • the profit threshold – the RPDT tax free “allowance” – over which the RPDT will be charged; and

  • the inclusion, or exclusion, of development profits arising from build-to-rent.

Scope

The tax will be levied on companies which:

  • are within the scope of corporation tax; and

  • undertake “residential property development activities”.

The consultation had indicated that only the “largest” residential property developers would be affected, with smaller developers falling outside of the tax net by virtue of the proposed “tax-free” profit allowance of £25 million (allocated on a per group basis). Interestingly, the draft legislation does not contain any reference to this £25 million figure, with the sections on the tax-free allowance instead containing a placeholder. Presumably (since the rate of the tax is also yet to be announced, at the end of the month), HM Treasury are still calculating how to raise the intended £2 billion from the RPDT by the end of the decade.

The meaning of “residential”

The meaning of “residential” is similar to (although not mirroring) that used in SDLT legislation, being a building which is “designed or adapted, or is in the process of being constructed or adapted, for use as a dwelling”. This definition can capture buildings which are, for example, being converted from retail to residential use, even where gaining planning permission has not been necessary for this purpose. While using permitted development rights has long been beneficial from a planning regulation perspective, developers using such rights will still need to consider in detail the applicability of, and compliance with, the RPDT. 

The definition also includes the gardens and grounds of, and any interest in or right over land which exists to benefit, those buildings (such as communal areas), as well as extending to land over which residential planning permission has been granted or is being sought.

As indicated in the consultation, defined types of “communal dwellings” benefit from a specific carve-out, which covers institutional buildings such as prisons, hospitals, care homes and residences for police and armed forces. Following the extensive consultation process, the government has listened to calls to include student accommodation in the carve-out. However, retirement communities (such as sheltered accommodation) that offer accommodation and communal facilities for older people who are not reliant on care provision will be subject to the tax.

It will be interesting to see whether HMRC will publish specific guidance on other specific asset classes, such as co-living developments, which may have a “non-residential” use class for planning purposes (being either C1 (hotels) or sui generis).

Student accommodation

Those in the PBSA sector will likely welcome the definition of “student accommodation”, which simply requires that:

  • the building is (or is in the process of being) designed or adapted for use by those who will occupy it for the purposes of a course of education; and

  • it is reasonable to expect that the building will be occupied by students for 165 days per year.

This should:

  • allay concerns that, while traditional halls-of-residence may have fallen out of scope, so-called cluster flats and newer-style student studio apartments would be caught; and

  • remove the need to consider in detail the physical characteristics of each unit to ascertain whether the building is residential or not (as is the case for SDLT).

The meaning of “residential property development activity”

Further, as expected, the definition of “residential property development activity” is wide, with the draft legislation featuring a non-exhaustive list capturing everything from seeking planning permission on land to marketing, managing and dealing in residential land.

Crucially, in order to be considered to be undertaking a “residential development activity”, the developer (or a connected company) must have, or had, an interest in the relevant land, ensuring that third-party contractors will fall entirely outside the RPDT net. That the draft legislation also captures those who previously had an interest in the land means that the applicability of the RPDT should, in particular, be closely considered where there is a forward funding or overage arrangement, and the vendor (when they no longer own the land) later carries out residential property development activities in relation to that land.

Having an “interest” in the land extends beyond simply owning the land, to also having, for example, the benefit of a condition, obligation or restriction which affects the value of the relevant land (such as a restrictive covenant) – but will not include a mortgage or a licence to use.

At the moment, the draft legislation also requires the land to be held as trading stock. This may change once the government has confirmed its position on whether build-to-rent will be included – which should be confirmed soon. If the government chooses not to bring build-to-rent within scope, then, in practice, the crucial question will often be whether the land is held as trading stock, rather than whether the property falls within the definition of residential.

Taxing model

The original consultation envisaged two different Models, with Model 1 taxing all the profits of a company or group that undertook a certain amount of residential development activity, and Model 2 only taxing residential property development profits. The chosen model is closest to that envisaged by Model 2, with profits that do not relate to residential property development being carved out under the calculation rules. Those within the scope of RPDT are required to apportion profits which do and do not relate to residential property development activities on a “just and reasonable” basis.

The computational rules are such that various RPDT-specific group and loss relief rules are available, which are drafted to function in a similar way to those for corporation tax. The draft legislation confirms that financing costs will not be deductible.

Unexpected consequences?

It is currently unclear how this tax will impact on other government priorities when delivering residential development. There is concern that if the tax puts the “squeeze” on profit margins it will result in the reduction in the delivery of affordable homes, both to rent and to buy, or a decline in the quality, sustainability standards or overall size of new housing. This is because RPDT will inevitably become part of the viability assessment of residential development at the planning stage. This has already been seen in local planning authorities who have adopted community infrastructure levy. In some boroughs RPDT will be an additional layer of tax on residential development.

Going forwards

The consultation on the draft legislation closes on 15 October, with the final version of the legislation to be published at the Budget on 27 October, alongside the eagerly anticipated announcement of the rate and the RPDT tax-free allowance.

It is expected that the decision on whether build-to-rent will be included will be published before the Budget, but a final decision on this should at least be known by the end of October.