12th January 2022
A new tax affecting the property sector, the Residential Property Developer Tax (RPDT), will be introduced from April 2022. It will apply to certain profits from residential property development. RPDT is the first part of a two-pronged initiative to raise £2 billion from the property development sector to meet the cost of remedying defective cladding. The second part is the proposed Building Safety Levy which will apply from 2023 to new high-rise (above 18 metres) residential development. Further details of the Building Safety Levy are to be issued.
RPDT is an additional tax at the rate of 4% on profits of a company which are attributable to the development of residential property and which exceed a £25 million annual profits allowance (spread between any group companies). The tax will be levied on such profits arising after 1 April 2022, including where the company’s accounting period straddles that date.
The tax will apply to companies which carry on residential property development activities or hold a 10% or higher interest in a corporate joint venture which carries on such activities.
The £25 million annual profits allowance will mean RPDT is most likely to apply to major residential developers or significant one-off residential developments and is less likely to be relevant to smaller residential developers or those who are primarily commercial property developers.
RPDT applies in addition to corporation tax but RPDT profits are calculated in a slightly different way, and finance costs and corporation tax losses and reliefs cannot be set against RPDT profits. There will be a separate regime for carry forward and group relief of RPDT losses.
RPDT applies to the profits of a company from residential property development (RPD) activities and the following tests apply:
Even if a company does not meet these tests in relation to its own activities, it may be subject to RPDT on the RPDT profits of a joint venture company in which it is a shareholder holding 10% or more. The rules applying to interests in joint venture companies are complex, but they allow RPDT profits to be attributed to a 10% plus shareholder to the extent that the joint venture company profits are less than the £25 million annual allowance of that company.
A property is treated as residential if it is designed or adapted, or in the process of being constructed, for use as a dwelling. Land over which planning permission for residential development has been obtained or is being sought is also treated as residential property.
Certain types of communal dwellings are excluded from the tax, including institutional buildings such as care homes, prisons, hospitals and living quarters for police and armed forces members.
Purpose-built student accommodation is also outside the scope of the tax. The relevant exclusion applies to a building which is designed or adapted for use by those who will occupy it for the purposes of a course of education and it is reasonable to expect that the building will be occupied by students for 165 days annually. Developers of student accommodation will need to check the terms of this exemption against the circumstances of a specific project.
There has been lobbying to exclude the development of retirement housing and supported living accommodation from the scope of RPDT but the government has decided to keep such developments within the scope of the tax.
Residential development profits of a non- profit housing company are exempted from RPDT. A non-profit housing company is a non-profit registered provider of social housing, including similar entities under housing legislation in Wales, Scotland and Northern Ireland, and the wholly owned subsidiaries of such companies.
The first £25m of RPDT profits in a period will not be subject to RPDT. Where a company is a member of a group of companies, the £25m allowance is allocated across all members of the group according to the number of group companies or as the group elects.
Although not exempt as such, profits from the development of build-to-rent property will not be subject to RPDT where the developer will hold the property as an investment and it is never treated as trading stock of the developer or a group or related party.
Those involved in residential development projects will need to understand whether RPDT may be relevant to the profits from a particular project and, if so, how it may affect the return from and cashflows of the project.
Many smaller developers will find that the returns from their projects do not exceed the £25m annual allowance before RPDT applies. However, larger developers or those involved in a significant project may find the allowance is exceeded.
It is unlikely that an RPDT liability will fall within the usual project costs definition so the impact of the tax is likely to be borne by the party or parties carrying on RPD activities who will need to model the risk in their project assessments.
Where RPDT may be an issue, tax due diligence is likely to be needed on the structure, for example to identify whether the holding of land interests could bring a party within scope and/or whether any exceptions being relied on (such as for student accommodation or defined communal living) are met, and to understand the impact of any partnering or joint venture arrangements. Contractual protection may be needed where the availability of an exemption depends on the actions of a third party.
The tax applies to profits arising after 1 April 2022. There is no grandfathering for current projects so profits from projects in progress may be caught.
Walker Morris’ tax advisors are commercially-focused tax lawyers experienced in structuring transactions and negotiating deals as well as dealing with the tax authorities and other parties. The emphasis is not just on the calculation of tax but on giving practical and commercial advice. For further advice or information on RPDT, whether in general or in relation to a particular residential development or commercial arrangement, please do not hesitate to contact us.