Residential Property Developer Tax – draft legislation issued

Further to a consultation over the summer of 2021, HM Treasury alongside HMRC issued on 20 September 2021 draft enabling legislation to provide for the introduction of a Residential Property Developer Tax (RPDT) on corporates. The summer consultation outlined how the tax would apply to profits arising from the development of certain residential accommodation whether developed to sell or to hold for rental. The draft legislation currently only covers development to sell, but it may yet be expanded to apply to development to hold activity.

For further background on the summer consultation process see our earlier article.

Key matters outstanding

While the draft legislation provides certain points of clarification, certain fundamental areas remain unaddressed - specifically:

• No statement of the rate of tax;
• No statement of the annual allowances for developers (this had been stated to be £25 million in the summer consultation);
• No legislation in respect of development to hold activities (HMRC state that this is to allow for further political consultation); and
• No legislation in respect of affordable housing (again, to allow for policy discussion).

Matters clarified by the legislation

The draft legislation does provide clarification on a number of points. The following is based on our review of the legislation to date and thus is subject to change.

• The tax is chargeable on companies only, irrespective of residence. Entities that are not companies thus appear excluded;
• The tax will be levied on residential property development profits within a company (Model 2 in the summer consultation) rather than the entire company’s profits where some activity relates to residential development (Model 1 in the summer consultation). This is a welcome development – but will require identification of those residential property development profits within entities that carry out a combination of residential and non-residential development;
• The tax will be based on profits as calculated for corporation tax purposes (the consultation had put forward an option for taxing accounting profits);
• In terms of impacted asset classes, all student accommodation appears to be excluded. In contrast, retirement living (as opposed to residential care) seems in scope;
• A wide range of activity is brought into the charge as well as ‘ancillary’ activities. The intention seems to be to prevent the ‘fragmentation’ of profits out of a developer company to other group companies;
• No relief will be given for finance costs, as anticipated at the summer consultation, or for losses from other activities, or for capital allowances;
• An exemption for charities will be given but only for charitable trading. However, it is unclear whether a charitable group will be able to shelter group profits from RPDT; and
• The tax will apply from 1 April 2022, applying a time apportionment basis to the ‘straddle’ period. Anti-forestalling rules are proposed.

What does this mean?

The wide scope of assets and the exclusion of relief for finance costs may lead to more businesses being in scope than might initially be expected. However, until there is clarity over the outstanding matters referred to above, particularly whether development to hold and affordable housing will be included in the scope of RPDT, it’s difficult to assess the full impact of the tax.

Property developers who are in scope for RPDT face continued uncertainty, particularly in the absence of a tax rate, which makes planning and funding development sites extremely difficult. 

What’s next?

The legislation is the subject of a consultation which is to close on 15 October 2021 with a view to its inclusion in the Budget announcements on 27 October 2021 and enactment to apply from 1 April 2022. HMRC are holding a consultation meeting on 30 September 2021. 

For further information please contact:

• Adrian Wills
• Siobhan Lodder