Following the tragedy at Grenfell Tower in London, the UK government have made it a priority to address the issue of unsafe cladding on residential units. In response, the government have announced that it would introduce a new tax levy in 2022 on the profits which large residential property developers make from UK residential development.
Housing Secretary Robert Jenrick said the new taxes would be to “ensure the industry takes collective responsibility for historic building safety defects”.
This new tax would be time limited with the government aiming to raise at least £2 billion over the decade which it is enforced. The government aims to operate this tax fairly and effectively in relation to the corporate group and rather than a blanket approach, this tax would only be due from the larger residential property development groups.
The HM Treasury guidance states that the purpose of the charge is to “ensure that the largest developers make a fair contribution to help fund the government’s cladding remediation costs”
Who will this tax apply to?
The tax will be charged against the largest residential property developers who:
- Undertake “residential property development activities” and;
- Generate profits which exceed the proposed £25 million annual allowance.
The definition of “residential” reflects that used in the Stamp Duty Land Tax legislation and encompasses any building “designed or adapted or is in the process of being constructed or adapted, for use as a dwelling”. Certain specialist communal dwellings such as hotels, residential homes for the elderly and boarding schools will be excluded from the definition of residential property. The government have yet to decide if student accommodation will also be excluded.
The Design of Residential Property Developer Tax (RPDT)
The government have put forward two models for the design of this tax; the company-based approach and the activity-based approach.
- Company-based approach: The total profits of a company which carried out ‘more than an insignificant amount’ of UK residential property development would have to pay RPDT.
- Activity-based approach: Would only levy tax on the profits of a company that come from UK residential property development.
The latter approach would be more administrative heavy but it would avoid any non-residential property related profits being charged further tax.
The Impact on Affordable Housing
One of the key aims of the consultation process for RPDP is to ensure the tax does not have a negative impact on the already struggling affordable housing market. The government have already highlighted that while any profits arising from affordable housing development would be subject to this tax, developers operating at a cost only return or charities will not be liable for the tax. The government anticipate that the cost and thus availability of affordable housing would be largely unaffected due to the fact most of these developers would operate at cost only return and thus would not be taxed.
The bill is still in consultation period and the final details, including the rate of tax will be announced at the Autumn Budget on 27 October 2021.
Contact our Residential Property Solicitors Glasgow, Scotland
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