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A New ‘Residential Property Developer Tax’: What we know so far

The government has published draft legislation for a new Residential Property Developers Tax. Here's what we know so far.

The government has recently published draft legislation and guidance for a new tax, expected to be included in the 2021-2022 Finance Bill.

Residential Property Developers Tax will be charged on the profits of companies carrying out ‘residential property development’ from 1 April 2022 (proposed). The proceeds of this new tax, at least in part, will be used to help fund the removal of flammable cladding from high-rise buildings, in the wake of the Grenfell disaster.

Ahead of the official announcement at the Autumn Budget on 27 October 2021, we take a look at what we know about this tax so far, its potential effects, and which crucial details are missing.

Who will be affected by the tax?

Residential Property Developers Tax will be charged on companies who are:

  1. within the charge to UK corporation tax and
  2. carry out residential property development activities on or in connection with land that they have an interest in.

Companies who meet the above definition are labelled, for the purposes of the draft legislation, as a Residential Property Developer.

Residential property development activities are broadly defined and include constructing or adapting residential property, designing, marketing, or managing residential property, or seeking planning permission in relation to a proposed residential development.

Which developments will be subject to Residential Property Developers Tax?

The definition of ‘residential property’ for the purposes of the new tax is equally broad. The definition extends further than conventional flats and houses, also covering land for which planning permission has been granted or sought.

Justifiably, some are concerned that the introduction of Residential Property Developers Tax in its current format, could stifle the housing industry in an already challenging post-Covid era. Some comfort is provided by a healthy list of communal developments that are explicitly excluded from Residential Property Developers Tax liability by the draft legislation. These include:

  1. hotels
  2. hospitals and hospices
  3. homes or institutions for those who have a disability, suffer from substance dependency or are elderly
  4. student accommodation
  5. accommodation for members of the armed forces or emergency services.

Last week, HM Treasury also announced that profits deriving from Build-To-Rent properties will not incur Residential Property Developers Tax, although we await official clarification from the government on complex legal issues surrounding this topic.

How will the tax be applied?

Residential Property Developers Tax liability will only apply to a company’s trading profits which relate to residential property developments; where a development is for mixed use, only the residential profits will be taxable. The profit to be taxed under the new rules, is calculated by adding the company’s tax adjusted profit to any joint venture profit, before deducting all applicable reliefs. The tax is only charged on taxable profits which exceed an annual allowance.

What don’t we know?

Perhaps most crucially, the actual tax rate is yet to be announced. This, alongside an annual allowance (if any), are expected to be announced at the Autumn Budget on 27 October 2021. We also expect a raft of anti-avoidance legislation aimed at anti-forestalling and other such Residential Property Developers Tax avoidance measures that are likely to arise.

The consultation period on this draft legislation closed on 15 October 2021 (after extension).

If you have any questions about the Residential Property Developers Tax, please contact Karen Mayne or Jon Shankland. Do keep an eye out for our Autumn Statement Summary and comments following the Chancellor’s presentation on Wednesday 27 October.

For further guidance or support, contact our international private wealth lawyers.

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