Consultation on new tax for UK residential property developers

The government is consulting on a proposal to introduce a new UK-wide tax for residential property developers from 2022, with a view to generating revenue to cover the costs associated with the removal of unsafe cladding.

The measure is intended to generate at least £2 billion over the course of a decade, which the government says is a “fair contribution” to the overall cost of the remediation programme. The tax will be focused on the “largest corporate undertakings that make money from UK residential property development activities”.

An interesting point arising from the consultation is that the government recognises that many large developers who could end up paying this tax have had limited involvement in the development of high-rise buildings that require remediation, and that others have taken independent steps to cover the costs of remediation where applicable. However, it is claimed that the government has supported confidence and liquidity in the residential property market through the temporary SDLT rate reduction and mortgage guarantee scheme, and this buoyance in the property market is seen as justification for the tax potentially being imposed.

At this stage, the government is sharing ideas and seeking responses to the consultation document before 22 July 2021, and there are no firm proposals as to the amount of the tax. However, the key elements of the residential development property tax (“RDPT”) being suggested are as follows:

• It is proposed that RDPT will apply from 1 April 2022.
• The primary focus of the tax is on the development of residential properties located in the UK, whether for sale or rental (i.e. build to rent will be included).
• Residential property is likely to include not just houses and flats, but also buildings “suitable for use” as dwellings, undeveloped land where a planning permission to construct residential property has been obtained, and any existing buildings being adapted for domestic use. Further thought is being given to whether student accommodation will be included.

There are two alternative ‘models’ for the tax being considered:

• Model 1 would tax all of a company’s profits (including profits from commercial property development) where that company’s activities include more than an “insignificant” amount of residential property development. The threshold/de minimis to establish “insignificance” has not been suggested; or
• Model 2 would impose RDPT on any company that undertakes any amount of UK residential property development, but the tax would only be applied to profits from the residential property development activities.

• It is proposed that the RDPT will not be reduced by any existing (pre-April 2022) losses, group relief, or funding costs – in this way it is intended that the profits of the residential property development business will be “ring-fenced”.
• RDPT is proposed to apply only to businesses with relevant profits exceeding a group-wide annual allowance of £25 million. For those companies within the scope of the tax, it is proposed that it is only profits exceeding this £25 million annual allowance that will be subject to RDPT.
• It will be time-limited to a decade, with a possible extension if it does not raise sufficient revenue over that period.
• No rate has been announced.

Separately, the Government is proposing also to introduce the “Gateway 2” levy, which will apply when developers seek permission to developer higher risk residential buildings in England (in particular, on buildings to be constructed over 18 metres in height). The scope of this levy was not discussed in any detail in the RDPT consultation document.