New UK Residential Property Developer Tax: Triggers For Liability – Real Estate and Construction

Summary

Following publication of the new Residential Property
Developer Tax for technical consultation, we examine when this tax
will be charged and the types of development activities that will
bring developers within scope.

The Treasury has published draft legislation for the Residential
Property Developer Tax (RPDT) for technical consultation ahead of
its inclusion in the 2021-22 Finance Bill.  This follows an
initial consultation on the policy design in April 2021, on which
BCLP has previously blogged.  

The RPDT is a new tax to be collected by HMRC that will take
effect on 1 April 2022.  It will be charged on large
residential property developers and will be used to help pay for
the removal of flammable cladding from high-rise buildings. The
final design of the tax, including the rate of the tax, will be
announced at the Autumn Budget on 27 October 2021.

Liability for RPDT

The RPDT will be charged on the residential property development
profits of corporate residential property developers (“RP
developers”) at a rate that is yet to be announced.

As currently drafted, RP developers that are within the charge
to corporation tax and undertake ‘residential property
development activities’ (‘RPD activities’) will be
liable for the RPDT.  For the purposes of this blog, we
discuss the types of activities that will potentially trigger
liability for RPDT rather than the design of the tax.

What will bring a developer within scope of the RPDT?

To fall within the scope of the RPDT, RP developers must carry
out an RPD activity:

• on or in connection with land it has, or had, an interest in;
  and




• for the purposes of, or in connection with, the development of
  residential property.

What constitutes an interest in land?

An interest in land is widely defined and includes interests,
rights or powers over land which are held as part of trading stock
of a trade. A company is deemed to hold an interest in land if an
interest in that land is held by any related company. 
However, mortgagors and licensees are excluded.

What comprises an RPD activity?

Almost anything typically carried out during the development of
residential property will be an RPD activity. The draft legislation
provides a non-exhaustive list that includes dealing in, designing,
seeking planning permission, constructing, adapting, marketing and
managing residential property and any ancillary activities. 
Profits from these activities are all included within the RP
developer’s base for the tax.

Planning permission as an RPD activity

Profit arising from the grant of planning permission to build a
residential property could be subject to the RPDT.  However,
under the current draft legislation the property needs to be held
as trading stock of a trade for the tax to be
triggered.  

Developers who apply for or obtain planning permission for a
residential development may be liable when they come to sell the
property with the planning permission even if the development has
not been constructed.

Are all residential property developments potentially subject
to the RPDT?

Residential property includes buildings that are designed,
adapted or are being constructed for residential use, as well as
land intended for residential development where planning permission
is sought or granted, along with general amenity land developed
alongside residential property.

However, there are a number of exclusions for specialised
residential uses (eg student accommodation, retirement homes where
personal care is provided, hospitals etc), which are not defined as
‘residential property’ and therefore fall outside the scope
of the RPDT.  A policy decision has yet to be made on whether
or not to exclude Build to Rent.

Comments

This widely drafted legislation has the potential to bring a
large number of developers within its scope.  Developers
caught by the legislation need not be involved solely in
residential development.  Mixed use developments that contain
some residential element may also be charged in relation to the
profits from the residential activity.

The rate at which the RPDT is ultimately set will be critical.
Alongside the new Gateway 2 Levy to be introduced in connection
with the Building Safety Bill (for further details see here), there could well be a cumulative impact
on development viability with potential impacts on housing supply,
and thus the delivery of planning benefits including affordable
housing.

Developers who wish to participate in this consultation have a
small window to do so, as the consultation closes on 15
October.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.