Property Developer Tax – what we know so far

The Chancellor confirmed in his Autumn Budget 2021 speech the introduction of a 4% residential property developer tax (RPDT) to be charged on profits of companies carrying out residential property development.

The draft legislation will be included in the 2022-2023 Finance Bill on 4 November.

Why is this new tax being introduced?

Earlier this year the proposal to introduce a new tax on property developers was announced as part of the Government’s Building Safety Package in order to ensure that the largest developers make a fair contribution to help fund cladding remediation costs. The draft legislation follows the conclusion in July of consultation on the design of this proposed new tax.

It followed the Housing Secretary’s announcement in February 2021 of plans to bring an end to unsafe cladding through a multi-billion pound intervention, with the aim of raising £2 billion through the RPDT over the next decade.

Which companies and activities are affected?

The draft legislation introduces a tax charge on residential property developers from 1 April 2022, with profits from periods straddling that date being apportioned. The RPDT will be charged on residential property development profits calculated according to a formula set out in the legislation, and subject to an annual allowance.

The following would not be subject to RPDT:

• groups exclusively carrying on activities as a third-party contractor in relation to residential developments of an unconnected developer
• commercial development
• residential development outside the UK

The tax will apply to companies within the charge to corporation tax which undertake residential property development (RPD) activities and have profits above £25m, the tax will be calculated at the applicable rate on the company’s RPD profits so far as they exceed its allowance for the relevant accounting period.

RPD profits for these purposes will be calculated in accordance with a formula, essentially adding together a company’s ‘adjusted trading profits’ (or losses, as the case may be) and its joint venture profits (or losses) – so far as in each case they relate to its RPD activities – and then deducting allowable loss relief, group relief and carried forward group relief.

However, RPDT is not a supplementary corporation tax. Collection and management of the tax will be the responsibility of HMRC, but it will be run as a separate system.

Residential developer companies (with certain exemptions) will be required to include in their company tax returns a statement of RPD profits, losses and reliefs.  It is worth noting these further points:

• the measure of profits which attract the tax is calculated without deduction for finance costs – including third party financing – so the £25m threshold might catch more companies than was first envisaged
• RPDT will be ignored and no allowance made when calculating mainstream corporation tax liabilities
• the consultation does not announce the rate of tax. Indications are this will be  ‘proportionate’, taking into account the proposed 25% rate of corporation tax coming in from 2023
• any unused amount of the annual allowance will not be capable of being carried forward

What next?

There are some areas of the policy and legislation that have not yet been finalised. In particular, the draft legislation does not cover the treatment of build-to-rent or affordable housing activity.

For further guidance please feel free to contact us.

For more Autumn Budget analysis, visit our Budget hub.