Sections 32–52: residential property developer tax
It is a corporation tax surcharge for residential property developer companies. It has effect in relation to accounting periods beginning on or after 1 April 2022 (with the now usual anti-forestalling provisions to prevent developers accelerating profits to an accounting period ending before that date).
What is the purpose of RDPT?
The government’s aim is to raise at least £2 billion through RPDT over the next decade. It is part of efforts by the government to recoup the £5bn it has committed to assist with the resolution of cladding and fire safety issues that have come to light since the Grenfell Tower tragedy.
Whilst RPDT is “not intended to imply responsibility on behalf of the payers for historic construction defects in relation to cladding”,1 it is seen by the government as a “fair contribution”2 by large developers which, it believes “are operating in a market that will benefit from the substantial amount of funding the government is providing to address building safety defects”.3
When will RPDT apply?
RPDT will be levied on the profits of companies carrying out activities in connection with the development of residential property (RPD activities). The scope of RPD activities is very wide and includes dealing, designing, seeking planning permission, constructing or adapting, marketing or managing any UK land where the company (or a connected company) has, or in certain circumstances had, an interest in that land. Companies will be treated as carrying on RPD activities after ceasing to have an interest in land where those activities involve (as a matter of fact) designing, seeking planning permission, constructing or adapting the land which they no longer own, and such activities were anticipated at the time when the company ceased to own it.
The broad scope (and the list is non-exhaustive) means that (for example) a property trader who merely obtains planning permission to subsequently sell the land to a developer will be caught by the RPDT even though the trader realises their profit and sells the land before any development is carried out.
There are a couple of principled exclusions from the scope of RPDT. The interest in land requirement is intended to exclude third party contractors (as well as architects, agents and property managers provided the interest in land test is not met). An initial idea to introduce a surcharge for build-to-rent developments was quickly abandoned and in a written question tabled on 15 November 2021 the Financial Secretary to the Treasury confirmed that RPDT will not apply to companies that construct properties to hold as investments.4 Developers in forward fundings, however, will not be exempt.
What is the tax rate?
RDPT will be charged at a rate of 4% on the “residential development profits”5 of a company. For relevant companies, this brings the effective corporation tax rate up to 23%. Fortunately for developers, the planned corporation tax rise was scrapped at 23 September 2022’s mini-Budget, and this should further contribute to the overall sanguine reaction from industry.
Broadly, RPDT profits are calculated using the same principles that apply to UK corporation tax, with certain important exclusions, including:
- profits or losses derived from activities outside the scope of the RPDT, including capital allowances or charges;
- loss relief, group relief or carried forward loss relief from non-residential development activities; and
- finance costs.
The exclusion of finance costs when calculating RPDT profits will further increase the effective tax rate for developers using debt finance.
RPDT is charged as if it were an amount of corporation tax. It is provided that this applies all enactments applying generally to corporation tax, subject to the provisions of the Corporation Tax Acts. A non-exhaustive list of the topics which the relevant enactments should cover is then set out, and this list focuses exclusively on returns, assessments, appeals and administration. The omission of more substantive provisions is surely deliberate, but given the open nature of the list one might be hesitant to conclude that they do not also apply, and for example, where there is a provision which treats an amount as the profits of a trade carried on by a company for tax purposes (most relevantly in relation to the transactions in UK land rules) does that also mean that amount falls within RPDT?
Is there an allowance?
To reflect the aim that only the “largest developers” should be within the scope of RPDT, it will only apply to RDPT profits of a company (or group) that exceed an annual allowance of £25m.6 For these purposes a group consists of a parent company and their 75% subsidiaries.
This allowance is proportionately reduced for accounting periods shorter than 12 months and, in the case of a group, is automatically split equally between each group member unless specifically allocated by a nominated company.
How does RDPT apply to joint ventures?
RDPT will generally apply to a joint venture (JV) company (namely one that is not in a corporate group) as though it was an ordinary taxpayer. The main difference from a JV company’s perspective is that the JV company’s annual allowance under the RPDT is reduced in certain cases. In broad terms, where a JV company is itself subject to RPDT because its profits exceed its annual allowance, its shareholders (JV partners) will not also be subject to RPDT on their share of the JV company’s profits. Where a JV company is not subject to RPDT because its profits fall below its annual allowance, its profits are allocated to its JV partners and included in the computation of its JV partners’ individual RPDT profits, and subject to each JV partner’s own annual allowance.
Allocating a JV company’s annual allowance
The application of the regime to JV companies is further complicated because in certain circumstances a JV company’s annual £25m allowance will be reduced. This will happen where a JV partner holds a “substantial interest”7 (at least 10%) in the JV company and is exempt from RPDT (e.g. a charity or pension fund). In this case the JV company’s annual £25m allowance is reduced by a percentage equal to the profit share percentage held by that partner.
For example, where a pension fund holds a 20% stake in a residential development JV company, the JV company’s annual allowance will be reduced from £25m to £20m. The pension fund has its own notional annual allowance of £25m which it can allocate between any relevant JV companies. In this example, if the pension fund has no other interests in residential development JV companies, it can allocate the 20% of its notional allowance needed to give the JV company the maximum £25m annual allowance.
Are there any exclusions to RPDT?
The development of hotels, hospitals, care homes which provide personal care and property used primarily as student accommodation are also excluded from the remit of the RPDT. For these purposes “student accommodation” means use by occupants wholly or mainly for undertaking a course of education and where it is “reasonable to expect” that such accommodation will be occupied by such occupants for at least 165 days a year.
RPDT applies to anyone carrying out residential development activities where they or a connected party have held an interest in the relevant land. The definition of “interest in land” is very broad, however it does exclude licences, so building contractors who might merely hold a licence to occupy the land they are working on should not be caught.
This material was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in British Tax Review as Sections 32–52: residential property developer tax, British Tax Review 2022 Number 4 329-488 and is reproduced by agreement with the publishers.
1. HM Treasury, Residential property developer tax: response to the consultation (October 2021), Ch.1 [Accessed 22 September 2022].
2. HM Treasury, Residential property developer tax: response to the consultation (2021), Ch.1.
3. HM Treasury, Residential property developer tax: response to the consultation (2021), Ch.1.
4. Lucy Fraser MP, Financial Secretary to the Treasury, Property Development: Taxation: Question for Treasury (tabled on 15 November 2021) [Accessed 22 September 2022].
5. Finance Act 2022 (FA 2022) s.33.
6. FA 2022 s.43.