Residential property developer tax: will it affect you?
The residential property developer tax (RPDT) will come into force on 1 April 2022. Now is a good time to consider seeking expert tax advice from a real estate specialist.
The tax aims to raise approximately £2 billion in revenue over a ten-year period to fund the cost of remediating cladding issues on residential blocks in the UK. This is in response to the Grenfell Tower incident in 2017.
Only residential development companies will be subject to RPDT and the tax will only be charged on profits of residential units built for sale. After worries that investors would also be required to pay RPDT, the government has since clarified that residential units built for investment, such as build-to-rent, will not be included. There are also exemptions for asset classes like student accommodation, hotels and prisons.
After 1 April 2022, RPDT will be levied at a rate of 4% on relevant profits arising, which effectively acts as a surcharge through the corporation tax system.
Companies will have a £25 million allowance where no RPDT is charged, meaning that only profits above £25 million in any given year will be subject to the tax. Most small and medium-size developers will therefore not have to pay the tax. For groups, the £25 million allowance can be allocated between its constituent companies as it wishes, which provides some flexibility.
There is also a mechanism of loss relief, which acknowledges that many developments make losses for several years before profits. If the legislation from April operates effectively, this should mean the profits subject to RPDT are based on the profit for the overall development, not just the profit made in the year of sale.
In conclusion, it does appear the RPDT will only affect large developers, as intended by the government. However, smaller developers with sizeable projects would be wise to consider RDPT in their planning, to ensure they do not inadvertently incur an unexpected tax charge.
If you need help understanding RPDT, planning your development tax liabilities or structuring your developments more tax-efficiently, please contact our real estate and construction tax team.