What you need to know about the Residential Property Developer Tax

Scope of RPTD 

The tax will apply from 1 April 2022 on periods ending on or after that date, and will affect companies or groups which undertake UK residential property development where annual profits exceed £25 million. 

HMRC have defined residential property development activities as including ancillary activities including dealing in property, designing it, seeking planning permission in relation to it, constructing in and marketing and managing it. HMRC seem to want to prevent the ‘fragmentation’ of profits from a developer company to other group companies. Importantly, a property developer must have had an interest in the land, therefore profits of third party construction companies and building contractors are excluded. 

Where the tax will apply only to companies, there is no restriction on the tax residence of the company. Entities that are not companies are excluded. 

HMRC have taken on feedback from industry professionals and as a positive reaction have narrowed the scope of the draft legislation which was published for consultation; the RPDT will no longer be levied on longer term property investors, including those using a build- to- rent model although there is uncertainty as to whether this exclusion will remain in the long term. 

The draft legislation includes a number of exclusions on the definition of ‘residential property’, such as communal dwellings, ie hotels, purpose designed student accommodation, and supported housing providing for vulnerable groups. Retirement villages and other housing that do not include personal care are therefore currently within the charge to RPDT. 

Tax rate and exemption thresholds

HMRC have confirmed a 4% tax on UK residential property development profits which exceed the £25m threshold. The threshold will be provided as an ‘annual allowance’ for each group to use against their profits for the year and can be allocated by the group between its companies. Unused amounts cannot be carried forward. 

Where the proceeds do no exceed the threshold, there will be no need to report the RPD profits in the tax return for that period. 

The administrative arrangements for the allocation of the allowance between group companies (75% common ownership) subject to RPDT will work in a similar manner to the Corporate Interest Restriction (CIR) allowance procedure, including electing a nominated company and the preparation of an allowance allocation statement.

What’s next?

The wide range of assets and development activities within scope and the exclusion of relief for finance costs may lead to more businesses being in scope than might initially be expected. The exclusion of build to rent activities has however substantially reduced the population of businesses that will pay RPDT. Some of the computation aspects of the tax including the calculation of the developer’s allowance are complex.

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