4 percent Residential Property Developer Tax confirmed
The Chancellor’s Budget confirmed the introduction of a new tax on the largest residential property developers with effect from 1 April 2022.
The Chancellor’s Budget confirmed the introduction of a new tax on the ...
Further to a summer consultation and the recent publication of draft legislation, the Chancellor confirmed in the Budget the introduction of a Residential Property Developer Tax (RPDT) on corporates. RPDT will be levied on residential property development profits within a company from 1 April 2022. This forms part of the Government’s response to the Grenfell tragedy, and aims to raise £2 billion over 10 years to help meet cladding remediation costs. Notably it was confirmed in the Budget that the rate of RPDT will be set at 4 percent and that there will be a developer’s allowance of £25 million per annum applied on a group basis. Clarification concerning the rate of tax and the developer’s allowance is welcome and will allow businesses to model the impact of the tax.
Key Features of RPDT
A new policy paper published alongside the Autumn Budget along with the current draft legislation (published on 20 September 2021 and discussed in an earlier article) shed some light on how the new tax will operate.
RPDT applies to profits arising from the development of certain residential accommodation for sale. Following consultation feedback, build to rent developments are excluded. Also, an exemption has been given to non-profit housing providers (such as charitable housing associations). RPDT uses as its starting place the corporation tax (CT) code. Its broad characteristics are as follows:
- A person is only taxable if they, their group or a related party has, or had, an interest in land. Thus, a building contractor will not be taxable, but land promoters could be;
- It taxes profits from the development of certain residential accommodation – excluded categories include student accommodation and communal living such as care homes;
- Profits and losses derived from development need to be aggregated across a group. This value is then subject to certain adjustments - significantly, no relief is given for finance costs, or for losses derived from other activities; and
- The rate of tax is 4 percent, with a developer’s allowance of £25 million per annum applied on a group basis. Unused amounts cannot be carried forward. Complex rules apply to the calculation of the developer’s allowance for corporate joint ventures undertaking development.
Matters clarified by the draft legislation
The draft legislation, published in September, and the consultation process have provided clarification on a number of points:
- RPDT is chargeable on companies that are within the charge to CT only, irrespective of residence;
- Build to rent activities are not subject to RPDT, despite this being originally intended. This change arose due to the legislative difficulty of imposing an unfunded (dry) tax charge in a manner that preserves fairness;
- Affordable housing as an asset class is in charge. However, non-profit housing companies and their wholly-owned subsidiaries have a specific exemption from RPDT, while for profit entities (including for profit registered providers) remain in charge;
- A wide range of activity is within the charge as well as ‘ancillary’ activities. HMRC wish to prevent the ‘fragmentation’ of profits from a developer company to other group companies; and
- The tax applies from 1 April 2022, applying a time apportionment basis to the ‘straddle’ period. CT instalment payment rules have been modified to defer any payment until after this date but need careful review. Anti-forestalling rules exist to prevent profits being accelerated to before this date.
KPMG in the UK comment
This note is based on our review of the information and announcements at the time of writing and thus is subject to change.
Clarification concerning the rate of tax and the developer’s allowance is welcome and will allow businesses to model the impact of the tax.
The wide range of assets within scope and the exclusion of relief for finance costs may lead to more businesses being in scope than might initially be expected. The exclusion of build to rent activities has however substantially reduced the population of businesses that will pay RPDT.
Some of the computational provisions, particularly with respect to the calculation of the developer’s allowance, are complex, and HMRC guidance will be welcome.
The tax comes into force 1 April 2022. Updated draft legislation is expected to be published in the upcoming Finance Bill on 4 November 2021. We also expect HMRC to publish draft guidance on the application of the legislation in the coming weeks.