New Residential Property Developer Tax
From 1 April 2022, a new tax will be levied on profits from certain residential development in the UK. The policy was announced in February 2021 and HMRC has undertaken two consultations with relevant stakeholders over the following months.
The policy objective is to raise money from large-scale housebuilders to fund remedial work to cladding up and down the country which the Government will be underwriting. The intention is to raise around £2bn of revenue within a ten-year life span of the tax.
The tax will be levied at 4% on profits of such developers above an annual nil-rate allowance of £25m (split between entities in a corporate group).
Which entities are in the crosshairs?
The new tax will only apply to large residential developers. These entities must be companies that hold the land or property in question on a trading account (though non-UK resident companies are also within the scope of the new tax). Investors and those using the build-to-rent business model are excluded.
Interestingly, the tax also applies to companies that are not already in the charge to UK corporation tax (although the vast majority of affected companies would be). If such a 'non-taxable' company has either on its own or with other group companies a holding of at least around 10% in another company that is or is within a group of companies carrying on residential development activity for the purposes of the new tax, then any profits attributed to that non-taxable company are also caught.
The developer in question must have or have had an interest in the land from which profits are derived. Once this condition is met, however, the ambit of what counts as residential property development is wide – it includes trading or dealing in land, construction, applying for planning permission, adaptation, marketing and management.
Key exemptions are for non-for-profit outfits with a charitable purpose of providing affordable and social housing, such as housing associations and social landlords. Charities that develop residential property to raise funds to further their causes are subject to the new tax (and their taxable subsidiaries may not apply gift aid income against profits subject to the tax, as they can with corporation tax).
What counts as residential property is broadly similar to the stamp duty land tax (SDLT) regime (designed or adapted for use as a dwelling) and this includes where planning permission for land is secured or is being sought. Despite this, there are a number of exclusions such as for hotels, certain purpose-built student accommodation and care homes / sites that offer personal care. Retirement properties or sites offering no such care are within the scope of the tax.
Calculation of profits and losses and administrative details
Profits and losses are calculated in the same way as one would calculate regular taxable profits for corporation tax, though there are some notable differences.
Only profits from the relevant development activity are included (profits from other ventures such as letting of surplus real estate are not). No capital allowances are possible and no loss relief is possible except for losses arising from the relevant development activity only (which therefore means that interest expenses will be denied). Such losses arising in a prior year can be carried forward to the current year, while it is possible to surrender such losses to fellow group companies for the current year or carry forward for such group members against their profits arising from the residential development in future accounting periods.
Tax will be paid using the same return as for corporation tax, on the same dates and under the quarterly-instalment regime as currently applies for large corporates paying corporation tax on annual profits over £20m.
Although the specifics of the rules have been drawn more narrowly in the publishing of the most recent version of the Finance Bill for 2022, companies should nonetheless consider whether and how the new residential developer tax affects their business and how best to manage the additional administration.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.