Residential property developer tax: draft legislation

The government has published draft legislation for the proposed new tax on developers of UK residential property. The government intends to target the tax at companies or corporate groups undertaking UK residential property development activities generating profits in excess of a group-wide annual allowance. The new tax is intended to apply from 1 April 2022 and to last for a time-limited lifespan of around 10 years.

The final design of the tax will be announced as part of the Autumn Budget on 27 October. The tax rate and threshold allowance, which still remain to be confirmed, are expected to form part of that announcement.

Background

In April 2021, the government published a consultation document (Residential property developer tax: consultation on policy design) on the introduction of a new tax on the developers of UK residential property. The consultation set out the government's intention to raise at least £2bn to help fund remediation work in relation to cladding. The new tax is intended to apply to residential property developers operating in a market that will benefit from the substantial amount of funding the government is providing to address building safety defects and the impact that will have on market confidence and liquidity. As such, the government considers that it is fair to seek a contribution from residential property developers to the overall costs of the remediation programme.

The new residential property developer tax (RPDT) is one of two measures the government plans to introduce to contribute to the cost of cladding remediation works. The other measure proposed by the government is a new building safety levy, which will be applied when developers seek permission to develop certain high-rise buildings in England. This was the subject of a separate consultation published in July 2021 (The Building Safety Levy consultation).

The RPDT consultation made it clear that this new tax will be time-limited and would only apply to the largest property developers in relation to the profits they make from UK residential development. It is expected that the new tax will be introduced from 1 April 2022, with the government seeking to raise at least £2bn through the tax over a decade.

What will the RPDT apply to?

The draft legislation makes it clear that the new tax will be charged on the residential property development profits of a residential property developer (RP developer).

An RP developer is defined as a company within the charge to corporation tax which undertakes residential property development activities (RPD activities). This covers activities which are on or in connection with UK land and buildings in which the RP developer is treated as having or having had an interest and which are for or in connection with the development of residential property. Such activities include dealing in residential property, designing, seeking planning permission for, constructing, marketing or the management of residential property and ancillary activities.

The RP developer must have or have had an interest in the relevant property in order for the activities to fall within the scope of the tax. This will be the case if the RP developer or a “related company” has such an interest (including the benefit of an obligation or restriction or condition affecting the value of the land) other than a mere licence to use or occupy the land or a security interest. However, the relevant interest must form part of (or have formed part of) either the RP developer or the related company’s trading stock of a trade which includes carrying out residential property development for the test to be met. A company is a related company of an RP developer if it is a member of the same group, as well as certain joint venture companies in which, very broadly, the RP developer has a 10% or more interest.

Accordingly, the focus of RPDT will on companies and corporate groups that undertake residential property development on their own behalf.

What is residential property?

Residential property is defined to include any building designed or adapted as a dwelling, including any land that forms the grounds of such a building. It also covers any land in respect of which planning permission is sought for residential development, so is, in that sense, a wider concept of residential property than applies for other taxes such as stamp duty land tax.

However, the government has responded to feedback from stakeholders and has decided to expand the list of types of communal housing excluded from the charge to expressly include purpose built student accommodation. The draft legislation does this by requiring the relevant building to be constructed or adapted for use by persons who will occupy it wholly or mainly for undertaking a course of education and there to be a reasonable expectation that it will be so occupied on at least 165 days a year. Other types of communal residential accommodation which are excluded from being residential property include residential accommodation for children, the elderly, disabled, emergency services personnel and the armed forces.

What profits are within scope?

The overall approach taken by the draft legislation largely equates to the Model 2 approach put forward in the consultation (rejecting the Model 1 approach which would have taxed all the profits of an RP developer subject to a significance test).

The profits (or losses) within the scope of the charge “RPD profits” or “RPD losses” will, essentially, be the trading profits or trading losses of an RP developer, as calculated for corporation tax purposes, but ignoring a number of items:

• trading profits/losses derived from or related to activities other than RPD activities are excluded. Where an RP developer has both RPD activities and other activities, profits and losses must be apportioned on a just and reasonable basis between the RPD activities and other activities;
• corporation tax loss reliefs such as relief for carried forward trading losses and group relief are ignored; and
• third, credits/debits in respect of loan relationships and derivative contracts are excluded. This matches the proposal in the consultation document that made it clear that this was to prevent distortions of the tax base for RPDT depending on differing models of how interest is allocated.

Whilst RPD profits for an accounting period are calculated ignoring corporation tax loss reliefs, the draft legislation makes specific provision for RPD profits to be relieved using RPD losses of prior accounting periods, as well as through group relief of current year or carried forward RPD losses of other group companies. Broadly, carried forward RPD losses can only be used to relieve 50% of RPD profits in excess the RP developer’s allowance.

Under the draft legislation the RP profits of an RP developer subject to the new tax can also include RPD profits of joint venture companies in which the RP developer holds in interest. A joint venture company will fall within these provisions if it is itself an RP developer, is not a 75% subsidiary of another company and there are five or fewer participants which hold 75% or more of its share capital. The draft legislation attributes RPD profits (or losses) of such a joint venture company to a participant that is a RP developer where, broadly, the participant has a 10% or greater holding and the RPD profits of the joint venture company are below the threshold allowance for the JV company.

The consultation contained significant consideration of the calculation of profits where a completed property is retained and leased either by a build-to-rent developer, or as an interim measure until the developer's interest in a development is sold. The assumption was that it would be necessary to adjust the measure of profit in order to ensure that development profits are properly recognised for RPDT purposes. However, the draft legislation does not currently cover this scenario.

The draft legislation does not provide an exclusion for the build-to-rent sector, although this is understood to be a point on which stakeholders continue to lobby the government. Nevertheless, since the new tax is charged on adjusted trading profits, where property is developed by a company for built-to-rent and retained in the same company as an long-term investment, the draft legislation would not currently appear to lead to RPDT being crystallised on any unrealised profit in the property at completion of the property or, any realised profit on a sale of the property in the future (assuming properly taxable as a capital gain, rather than a trading profit). The position would be different if, for example, the property were to be developed in one group company and then transferred to another group company to hold as a long term investment. In that situation the development company would clearly be within the scope of RPDT on any profits arising to it from developing the property.

What is the tax rate?

The draft legislation does not as yet include the rate of tax to be applied to RPD profits which exceed the annual groupwide allowance. It is expected that the Chancellor will announce the proposed rate of tax at the Autumn Budget in October 2021.

Equally, the draft legislation does not yet set out the amount of the annual allowance or threshold for the tax – however the accompanying Explanatory Notes include a figure of £25m (which is the same figure considered in the consultation). As a groupwide allowance, the allowance will need to be allocated amongst any members of a group by an “allocating member”. There is no provision for any unused allowance to be carried forward to a future year. The effect of not nominating an allocating member is likely punitive in many cases, as the default position is then for the allowance available to a member of a group to be limited to the groupwide allowance divided by the number of group companies.

There are special provisions for determining the allowance of a joint venture company. In particular, if the joint venture company has a participating member with a 10% plus interest which is not within the charge to the new tax, then the joint venture company’s annual allowance will be reduced by the relevant percentage. This is subject to the participating member being able to nominate for a proportion of its “nominal allowance” to the joint venture company.

The amount of any RPDT paid will be ignored for other tax purposes and so will not reduce income or profits for other tax purposes.

How will it be collected?

The tax will be administered by HMRC and will be collected as if it were an amount of corporation tax. An RP developer will need to include details of its RPD profits in its company tax return.

Anti-forestalling

As indicated in the consultation document, the draft legislation contains anti-forestalling provisions. These will apply if an RP developer enters into arrangements on or before 29 April 2021 the main purpose of which is to secure a tax advantage by ensuring profits from RPD activities arise in an accounting period ending before 1 April 2022 (when the tax comes into force).

Comment

The RPDT is in many respects a unique element of the UK tax landscape, in that as well as being very clearly sectoral in target, it is intended to be time limited and the government has indicated how much the tax is should raise before that time limit expires. These points are relevant to the both the selection of the tax base and the tax rate for the RPDT.

The draft legislation released so far is less complex than many will have feared based on the options set out in the consultation, although some aspects of the rules are clearly ‘undercooked’ at present and require some refinement and/or fleshing out. Certain more administrative aspects (eg dealing with the process for allocating allowance between group companies) will only be covered in regulations, which are yet to be published and may add significant complexity.

The closing date for comments on the draft legislation, which is to be included in the 2022 Finance Bill, is 15 October 2021.