While the transition to a 25% Corporation Tax rate received a great deal of attention, it also brought about an effective rate of tax of 29% in the Residential Property Development sector, in the form of the Residential Property Developer Tax (RPDT).

Many governments have sought to raise additional tax revenues from the owners of UK residential property over the last decade and more. However, the introduction of RPDT, from 1 April 2022, brought about a targeted tax on Residential Property Developers.     

RPDT was introduced as part of a package of measures in response to the Grenfell tragedy, although it is not confined to those businesses whose developments encountered cladding issues.

The tax and the associated published guidance, issued shortly after the legislation was introduced, has created some additional areas of judgement.  These considerations, coupled with a greater understanding of HMRC’s intention as to how the tax should be administered, and how this is impacting the sector, merit a short recap on the key aspects of RPDT.

What is the Residential Property Developer Tax?

The Residential Property Developer Tax (RPDT) is levied on the relevant taxable profits of companies, earned post 1 April 2022.

• RPDT is charged at a rate of 4%.
• It is chargeable in addition to UK Corporation Tax.
• It is charged on profits realised on residential property development activities in excess of the RPDT annual allowance, currently set at £25 million (pro-rata for short accounting periods).
• Chargeable profits are calculated in the usual way.
• However, RPDT is charged on residential property profits without reference to loss or group relief and loan relationship debits/credits (e.g. finance costs such as interest)
• Capital Allowances, not relating to the property development activity, are also to be excluded. 
• An exemption applies to not-for-profit housing companies; with an exit charge if the company ceases to be a non-profit housing company.

What is a Residential Property?

A residential property is any structure used as a dwelling.

• Any buildings in the process of being constructed or adapted for such a use and the accompanying gardens and grounds.
• Land with planning permission, or where this is being sought, will also fall within the definition if this would cause the land or buildings to meet the criteria.

Are you undertaking Residential Property Development?

The definition within the legislation is wide-ranging, but the activities must be carried out by a developer:

• On, or in connection with, land that a developer has (or has had) an interest in (this includes interest through a related Group company and/or joint venture) with the intention to develop a residential property.
• Property or land must be held as trading stock as opposed to held on the balance sheet as an investment property.
• Auxiliary activities of another group company can be caught to the extent these activities are not also provided to third parties i.e. a group company producing timber frames for DevCo.   

However, a significant number of exclusions do exist:

• Residential accommodation provided for children, individuals requiring personal care (elderly, disabled or those with dependency issues).
• Residential accommodation for the armed forces or emergency services and hospital workers.
• Hospitals or hospices.
• Temporary sheltered accommodation.
• Prisons.
• Hotels or similar.
• Monasteries/Nunneries etc.
• Student accommodation.

What about Groups or Joint Ventures?

The £25m annual allowance is divided equally by the number of companies in the group unless an 'allocating member' is nominated to HMRC. An allocating member can allocate the allowance as required.

Group companies may only claim an allowance when there is an allocating member if a notional allowance statement is submitted to HMRC. Where a “substantial interest” (defined as greater than a 10% interest) is held in a relevant Residential Property Development JV company, then RPDT is required to be considered. 

A JV’s interaction with the annual allowance and its own notional allowance can be complex.  

RPDT Administration

The taxable profits and tax payable under RPDT are to be reported on the company’s tax return alongside any corporation tax due. The RPDT legislative framework follows that of corporation tax and therefore, aspects like Quarterly Instalment Payments (QIPs) need to be considered, as do the usual Corporation Tax time limits.

An allocation to individual group companies’ RPDT liability will be required in due course but does not need to be stipulated when making a Group Payment Arrangement payment.  

There is a new CT600N additional tax return form to complete for relevant companies, and this form enables the annual allowance to be set for each group company.

Where does this leave us?

While initially rolled out as a tax on Residential Property profits in excess of £25m, payable by only the largest players in the sector, the reality is all companies engaged in residential property development may be impacted in one way or another.   

Those undertaking residential property development or who have at least a 10% interest in a JV that does, may have additional tax to pay on these activities. 

Care needs to be taken in assessing the position as taxable profits are calculated before certain tax deductions are given.

Companies undertaking residential property development may have additional tax filing requirements with HMRC and will need to allocate the relevant entities an appropriate level of the annual allowance.

If you have any concerns or wish to discuss any issues highlighted by the above, then please do get in touch with your usual Johnston Carmichael corporate tax adviser or Stuart Thomson.