Residential Property Developer Tax: the 4 per cent charge, the GBP 25 million allowance, and the default that shrinks it
Residential Property Developer Tax is aimed at the largest housebuilders, and most developers will never pay it. But the GBP 25 million allowance belongs to the group, not the company, and if nobody allocates it the law divides it equally among every company in the group, including those that have nothing to do with development. Here is how the charge works, who is outside it, and the paperwork that keeps a mid-sized group from paying it by accident.
What the tax is and why it exists
Residential Property Developer Tax, introduced by Part 2 of the Finance Act 2022, is an additional charge of 4 per cent on the profits a company makes from UK residential property development, above an annual allowance of GBP 25 million. It was introduced as part of the building safety package announced in February 2021, to raise a contribution from the largest developers towards the cost of remediating unsafe cladding. It applies to accounting periods ending on or after 1 April 2022. It is charged only on companies within the charge to corporation tax. An individual, or a partnership of individuals, building and selling homes is outside it altogether.
Who counts as a developer
A company is a residential property developer if it is within the charge to corporation tax and carries on residential property development activities, and the activities count only where the company, or a company in its group, holds or has held an interest in the land being developed. HMRC's manual puts the distinction bluntly: only the activities of a developer are within the tax, and what separates a developer from a contractor is the interest in the land. A building contractor working on someone else's site is outside it. A company can also be a developer through a joint venture, where it and its group hold a substantial interest, meaning 10 per cent or more of the ordinary share capital, in a joint venture company that is itself a developer. Non-profit housing companies and their wholly owned subsidiaries are excluded.
What counts as residential, and what does not
The tax follows dwellings. Section 37 excludes several kinds of building that might otherwise look residential: purpose-built student accommodation where term-time occupation is generally restricted to students for at least 165 days a year, care homes providing personal care by reason of old age or disability, accommodation designed for and provided to the armed forces or emergency services by reason of their employment, similar housing for hospital workers, and temporary refuge accommodation for people escaping domestic abuse or homelessness. A retirement village is not excluded merely because care can be bought there, although the profit from providing the care itself is not development profit.
Building to let is outside, selling to a landlord is not
The line people most often misplace concerns rental housing. HMRC's manual gives two contrasting examples. A company that builds flats to hold and let has created a capital asset for its own property business, and that is not within the charge. A developer that builds the same flats and sells them to a landlord is within it, and it makes no difference that the buyer will let them rather than sell them on to individual owners. Temporary letting of unsold stock before sale produces property income, which is not chargeable, and so do ground rents on retained freeholds.
The profit is not your corporation tax profit
The computation starts from the company's trading profits for corporation tax and then strips things out. The one that matters most is interest. Section 39 excludes loan relationship and derivative amounts, so no deduction is given for interest on borrowing, and a heavily financed developer can have development profits well above its taxable profit for corporation tax. Carried forward trading losses and group relief under the ordinary rules are disregarded too, and replaced by a separate system of RPDT losses and RPDT group relief. Carried forward RPDT losses are subject to a restriction similar to the one that stops corporation tax losses reducing profits by more than 50 per cent once a deductions allowance is used. Where a development mixes residential and other space, profits are apportioned on a just and reasonable basis.
The allowance, and the default rule
A company that is not in a group has an allowance of GBP 25 million for a twelve month accounting period, reduced pro rata for a shorter one. A group has one allowance between all its members. For this purpose a group means companies with an ultimate parent company that holds at least 75 per cent of each of the others, by shares, by entitlement to distributable profits or by entitlement to assets on a winding up. HMRC confirms that two companies owned directly by the same individual, with no parent company above them, are not a group. Within a group, the allowance can be distributed however the group chooses, but only if the ultimate parent has nominated an allocating member and that member submits an allowance allocation statement. If no allocating member has been nominated, section 43 divides the GBP 25 million by the number of companies within the charge to corporation tax that are members of the group at the end of the parent's accounting period. That count includes property holding companies, service companies and anything else within the charge, not just the developers.
An illustrative group
Illustrative figures, not anyone's affairs. A family group has a parent company and nine subsidiaries, all within the charge to corporation tax. One subsidiary builds and sells houses. The others hold let property, provide management services or hold land that is not being developed. In the year the developer makes adjusted trading profits of GBP 30 million before interest, and pays GBP 7 million of interest, so its corporation tax profit is GBP 23 million. For development tax the interest is ignored, so its profits are GBP 30 million. With no allocating member nominated, its share of the allowance is GBP 25 million divided by ten companies, GBP 2.5 million, and the charge is 4 per cent of GBP 27.5 million, GBP 1.1 million. Had the parent nominated an allocating member and allocated the whole GBP 25 million to the developer, the charge would have been 4 per cent of GBP 5 million, GBP 200,000. The difference, GBP 900,000, comes down entirely to a nomination and a statement.
The paperwork, and when it is due
The nomination of an allocating member must be made in writing to HMRC and signed by an appropriate person on behalf of the ultimate parent, stating the first accounting period for which it has effect, and it continues until it is changed or revoked. It can be made on the CT600N supplementary page with the return or sent separately. The allowance allocation statement must reach HMRC within 12 months of the end of the accounting period, and can be revised later, broadly within 24 months of the end of the period or shortly after an enquiry or appeal is concluded. The tax itself is treated as an amount of corporation tax for collection and management, so it is reported on the company tax return and falls within the quarterly instalment rules for large companies. A company need not report where it is reasonable to assume it would have no liability, ignoring any RPDT losses. That test is about the liability, not the allowance headline, so a developer relying on the default share needs to check the number it actually has.
Questions for a growing developer
Is every company that holds an interest in land we develop inside or outside our group, and do we know how many companies within the charge the group contains? Has the ultimate parent nominated an allocating member, and is there an allocation statement for each period? What are our development profits with interest added back, rather than our taxable profits? Are any of our developments sales to landlords, which are within the charge, rather than developments we will hold ourselves, which are not? And if we are in a joint venture at 10 per cent or more, who is tracking our share of its profits? None of this matters to most developers. For the ones approaching the allowance, it matters a great deal.
Read the free guide
Apply for a Strategic Review
This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.