Background

In February the government announced a multi-million pound intervention to remove unsafe cladding. One of the elements of this scheme was the unveiling of two new taxes, a levy on high-rise residential blocks and a sector-wide developer tax (called “Residential Property Developer Tax” or RPDT). In April the government published a consultation document in respect of the developer tax, seeking feedback on its proposed design, application and administration. On 20 September the draft legislation was published ahead of its planned inclusion in the 2022 Finance Bill.

In this insight we provide a summary of the proposals for this new tax and look at what it could mean for the housing sector.

When is RPDT being introduced and how long will it last?

The RPDT will take effect from 1 April 2022. The tax is aimed to raise a sum of at least £2 billion over an initial time period limited to ten years. The sum can go towards funding the government’s efforts to remove unsafe cladding and remedy historic building defects. If RPDT fails to raise enough to reach its target over a decade, the government will consider extending its duration.

Who will RPDT apply to?

The RPDT applies to UK residential developers whose annual profit exceeds £25 million. The meaning of residential property closely follows the definition used in the context of the Stamp Duty Land Tax (SDLT) i.e. a house or flat that is considered as a single residence, together with the grounds and garden or any other land intended for the benefit of the dwelling. For land or property under development or undergoing a change in use this will include:

• an existing building suitable for use as a dwelling
• an existing building being adapted, restored or marketed for domestic use
• undeveloped land where a residential building is being constructed on it
• undeveloped land or land undergoing a change in use where planning permission to construct a residential property has been obtained.

Notable exclusions include residential homes for the elderly and specified vulnerable groups, as well as student halls of residence and care homes.

Territorially, the tax will be limited to include only residential developments in the UK.

How are the profits to be taxed going to be calculated?

RPDT will only apply to profits that exceed the £25 million annual allowance. The consultation document outlines two different models that are under consideration for how the tax is to be calculated:

1. An entity based approach - taking account of all profits of a company or group that has had significant profits from residential property development
2. An activity based approach - taking account only of profits actually arising from residential property development.

The rate of RPDT has not yet been disclosed but is expected to be announced at the Autumn Budget on 27 October.

What are the reporting requirements?

Those liable to the tax will be required to self-assess and notify HMRC of their liability within the necessary timescales and frameworks. A late filing of a return will result in a penalty charge.

What are the exemptions?

The consultation indicates that profits from the development of affordable housing including shared ownership will fall within the scope of RPDT. However, the good news is that the activities of housing associations benefiting from charitable exemption will not be subject to the tax. Only a small number of housing associations will therefore be directly impacted financially by RPDT (for example, groups that generate profits of more than £25m from the development of homes for sale or rent in non-charitable subsidiary entities or joint ventures).

What does it mean for the housing sector?

There is a risk of RPDT becoming an obstacle to the supply of affordable housing, as developers will inevitably start to factor the cost of the new tax into their pricing and modelling for current development projects. The consultation has been seeking views on how RPDT might impact the supply of affordable housing and how housing associations might be affected, so the design of RPDT may well change in due course as a result of feedback. .

Although many Registered Providers will be exempt for the time being, there is a risk that, if the tax fails to bring in the required funds to meet the £2 billion target, the government may widen the scope of the tax or extend its duration. Currently, only for-profit registered providers or charitable housing associations which make profits that are not used for charitable purposes would be liable. In any case, RPDT still represents an additional administrative burden for housing providers as they will still need to determine the estimated profit from development and prove that they do not fall within the scope of the tax.

The consultation on the draft legislation ends on 15 October 2021 and questions or comments about the proposed legislation can be directed to [email protected]. The remaining details of the tax including the final design and rate of the tax are expected to be announced at the Autumn Budget on 27 October.

How Capsticks can help

Capsticks aims to be the firm of choice to registered providers, offering a full service across development and planning law, corporate and securitisation, housing leasehold and asset management.

If you have any queries around what is discussed in this insight, or the steps that you can take in any given case, please speak to Spencer Vella Sultana or any of your contacts at Capsticks to find out more about how we can help.