Residential Property Developer Tax - HMRC announce a consultation

On 29 April 2021HMRC issued a consultation document for the introduction of a Residential Property Developer Tax (RPDT) on corporates. The rate has not yet been set, but it will apply from April 2022 to profits in excess of £25 million per annum.

While drawing on corporation tax concepts it is proposed to be a separate tax and, while stated to be time limited, its revenue raising target is expressed by reference to a decade. Its introduction is further to the five-point plan announced by the Government in February 2021 to deal with the cost of remediation of cladding, subsequent to the Grenfell tragedy.

Elsewhere, the plan includes payments to leaseholders to help meet the cost of cladding removal, and a consultation on a planning permission levy on high-rise residential developments.

RPDT applies to profits derived from UK residential property only, with some detail concerning that definition. While certain communal dwellings are excluded, purpose-built student accommodation and retirement living assets could be included where they are 'self-contained'. Affordable housing is in scope, but the consultation document suggests that such accommodation is developed at cost, not at profit.

RPDT seeks to tax both build-to-sell and build-to-hold with a requirement to measure profits derived from the development phase on the latter, thus potentially creating a dry tax charge.

The rules apply irrespective of the tax residence of the corporate developer.

Corporation tax's charitable exemption will be written across to RPDT so excluding businesses such as housing associations. The consultation is silent on other entities that enjoy exemptions such as local authorities and pension funds.

RPDT will apply to profits as calculated for these purposes in excess of £25 million for a 12-month period. The threshold applies on a group basis; the proposals acknowledge that this will require some thought in respect of joint ventures.

The consultation sets out two potential bases for the amount subject to tax. One model is to tax businesses on all of their profits, subject to a de minimis of development activity, while the other model is to tax all entities on their property development profits (which could be by reference to profits as computed for corporation tax purposes or by reference to accounting profits).

In either case, no relief is to be given for financing costs including interest and there will also be restrictions on relief for losses.

The tax will apply from 1 April 2022, to profits recognised in accounting periods ending on or after that date.

The consultation does not announce the rate of tax. This will be 'proportionate', taking into account the proposed 25% rate of corporation tax coming in from 2023.

Any unused amount of the annual allowance will not be capable of being carried forward.

The wide scope of assets within scope, particularly assets held for letting, and the exclusion of relief for finance costs may lead to more businesses being in scope than might initially be expected. Also, given that property development typically produces assets in phases, rather than smoothly over time, it's possible that developments could be unexpectedly brought into the charge of RDPT.

The consultation will run to 22 July 2021. In the meantime, property developers should model whether they could be affected by the proposals, albeit based on the limited information available.