As part of Michael Gove’s plan to raise the money required to remedy unsafe cladding, a 4% tax is now payable on the trading profits of companies and groups of companies generated from the development of residential land that exceeds the company’s annual allowance of £25m. The RPDT applies from 1 April 2022 for an initial period of 10 years so it is important that developers are aware now of whether this affects them or not.
Who will the RPDT affect?
- Companies and groups of companies. Individuals forming an LLP are not affected.
- Residential property developers, being either:
- A company who undertakes residential property development activities or
- A company which, on its own, or together with another group company, has a substantial interest in a relevant joint venture company
- It does not include a non-profit housing company
When will the RPDT apply?
RPDT applies to the profits of residential property developers:
From development activities
- These are widely defined and must relate to the development of residential property. They include dealing, designing, seeking planning permission, constructing or adapting, marketing, managing and carrying on activities ancillary to these.
- Designing, seeking planning permission and constructing or adapting will be development activities even if, at the time they are carried out, the residential property developer no longer owns an interest in the land, provided the activities were planned or anticipated at the time when the developer ceased to own the land.
- Conversions are considered a development activity but refurbishments are not.
- RPDT does not apply to build-to-let development because the land is held as an investment and the costs of cladding remediation are not passed to tenants.
Carried out by companies with an interest in land
For some activities (as set out above) the interest can be a previous interest in land. An interest in land is any estate, interest, right or power over land or the benefit of an obligation or restriction affecting the value of these. It excludes charges, mortgages and licences to occupy meaning that a bank with security over the property, a builder with a temporary licence to occupy, contractors, architects, agents and property managers are likely to be excluded from the charge.
The land must be held as trading stock for the purposes of activities related to the development of residential property. This means that it must be disposed or intended to be disposed of in the ordinary course of trade, which includes part disposals and the granting of leases or other interests out of the interest held by the developer.
Which is residential land
Residential land is:
- A building (or part) that is designed or adapted, or is in the process of being constructed or adapted for use as a dwelling
- Land which forms part of the garden or grounds of such a building (or part)
- An interest in or right over land which subsists for the benefit of such a building (or part)
- Land in respect of which planning permission is being sought (or has been granted) for the development of a residential (or partly residential) building
Communal dwellings are generally excluded which include:
- Residential accommodation for persons requiring personal care by reason of old age, disability, drug or alcohol dependency or mental disorder (which seems to mean that the development of retirement homes will not be excluded due to the personal care requirement)
- Residential accommodation for children, members of the armed forces and members of emergency services (or persons working in hospitals)
- Hospitals and hospices
- Temporary accommodation
- Monasteries and nunneries
- Student accommodation
The RPDT should be reported and paid using the same return and systems as used for corporation tax. We recommend taking advice from an accountant for details on how to calculate RPDT.
The RPDT is expected to raise £2bn towards the remediation of unsafe cladding but this is only one element of a wider plan. A few weeks ago the government revealed an agreement in which developers have committed to paying an additional £5bn to deal with the problem of unsafe cladding.
Housing developers have agreed to commit a minimum of £2bn to fix their own buildings and currently 35 of the UK’s largest homebuilders have signed the Department for Levelling Up, Housing and Communities' (DLUHC) Developer Pledge to fix all buildings over 11 metres in height that they contributed to the development of in the last 30 years. An expansion of the Building Safety Levy will raise the further £3bn over a 10 year period. The Building Safety Levy will be chargeable on developers when they apply for building control approval in respect of higher-risk residential buildings in England and the funds will be used to fix cladding on buildings between 11 and 18 metres in height where the responsible party cannot be identified or forced to remedy the defects. This will be in addition to the RPDT.
The DLUHC has also sent a letter to the Construction Products Association noting that, as construction product manufacturers have not signed up to a pledge similar to the Developer Pledge, the DLUHC will do “whatever it takes to make sure construction product manufacturers are held to account”. This will include using its new powers under the Building Safety Act 2022, which received Royal Assent on 28 April 2022. A summary of the Building Safety Act 2022 can be found here, plus a review of previous DLUHC correspondence with developers and manufacturers can be found here.