The new tax would be introduced in 2022 and seek to raise at least £2 billion over a decade. But there are warnings that it could deter property investors and derail the build-rent-market.
The Ministry of Housing announced on 10th February 2021 that it planned to introduce a new residential property developer tax (RPDT) as part of its Building Safety package to fund the replacement of non-compliant cladding on high-rise buildings.
The government is now consulting on the design of that tax ahead of its inclusion in the 2021-22 Finance Bill. The consultation* runs until 22nd July 2021.
The government is introducing two revenue raising measures:
- a new Gateway 2 levy to be applied when developers seek permission to develop certain high-rise buildings in England
- a new UK-wide residential property development tax (RPDT).
The government is today calling for views on proposed design features of the RPDT, including proposals that:
- it would apply to a measure of developers’ profit from UK residential development
- it would only apply to in-scope profits over £25m
- it would apply to conversion of existing buildings as well as new construction.
Ministers intend to set out the rate of the tax later. The is due to apply from 2022 and is intended to raise at least £2bn over a decade.
Financial secretary to the Treasury Jesse Norman said: “Ending the use of unsafe cladding is a priority for the government, as it builds back better from the pandemic. Given the significant costs associated with the removal of unsafe cladding, it is right to seek a fair contribution from the largest developers in the residential property development sector to help fund it.
“The government wants to ensure this tax is proportionate and works as intended, which is why it is launching this consultation today.”
Housing secretary Robert Jenrick added: “This tax will strike the right balance between developers making a contribution and ensuring fairness for the taxpayer.”
The consultation paper sets out the core principles that have been used to inform the design of the tax:
• Duration: the government intends for this to be a time-limited tax, with the aim being to raise cumulative revenue of at least £2bn over a decade.
• Scope: the government intends for the tax to be focused on the largest corporate undertakings that make money from UK residential property development activities.
• Tax base: the government believes that those undertakings should be taxed on a measure of profit that corresponds with their UK residential development activities. Taxing profit helps to ensure contributions are proportionate to economic returns and helps to minimise distortions that might come from alternative tax bases.
• Allowance: the tax would only be applied to profits that exceed an allowance to ensure that the tax is administrable and that the costs of business compliance are proportionate to liabilities.
• Corporate groups: the tax would apply to the largest residential property developers only.
Tax accountants at Blick Rothenberg have already pointed out some of the pitfalls. Heather Powell, a partner at the firm and head of property, said that the tax would cause many investors to think again.
She said: “The RPDT is to be payable on profits generated from residential development in excess of £25m, but no deduction will be allowed for any interest and finance charges when calculating the profit to be taxed. As interest is a major cost for many developers the tax could push a profitable development into a loss.
“The real shock is that the government proposes to tax the ‘development profit’ of investors building properties for rental. It is proposed an investor should pay the RPDT on the ‘assumed profit’ of these developments. The unearned profit that the government propose to tax is to be calculated by taking the market value of the new homes built less the cost to build them, excluding interest.”
She added: “The rent collected in the first year will not cover the tax liability, so the tax becomes an additional cost of the development – and many investment appraisals for these schemes will now fail.
“The government has a target of delivering 300,000 new homes a year which has never been met. Investors in “built to rent” have a contribution in the delivery of new homes. This proposal is going to reduce the number of build-to-rent schemes delivered, making it even harder to meet this target.”
* Residential property developer tax: Consultation on policy design [Click to open consultation document as a pdf]