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The Impact of Residential Property Development Tax


The June 2017 Grenfell Tower Fire was caused by a faulty refrigerator, but the external cladding on the building contributed to its rapid spread. In response, former Secretary of State for Housing, Communities and Local Government, Robert Jenrick, pledged in his February 2021 five-point plan, to provide grants and loans to remove this unsafe cladding on buildings over eighteen metres high. To cover these costs, from April 2022 the government have proposed plans to introduce a new ‘Residential Property Developer Tax’ (RPDT) with HM Treasury publishing a consultation document the same month. The proposal is, that RPDT will tax profits on the largest residential developers based in the UK, with profits over £25 million. Although there is yet to be a clear rate of tax announced, according to commentary by solicitors Pinsent Masons, “the measure of profits which attract the tax is calculated without deduction for finance costs- even, it seems, third party financing- so the £25m threshold may not be what it seems”, but the aim remains to raise more than £2 billion over the next decade.


According to the government’s proposal, residential property is a house or flat considered to be a single residence, but this definition also includes any building suitable for use as a dwelling, any already existing building being redeveloped for use as a house, or undeveloped land where a dwelling would be constructed. However, hotels, residential homes for children and the elderly, hospitals, accommodation for armed forces, boarding schools, prisons, monasteries, and nunneries will likely be excluded from the tax. As well as purpose-built care/support facilities for the homeless, the elderly, those with both physical and learning disabilities, poor mental health, and alcohol/drug dependency. Nevertheless, there are issues surrounding retirement properties, with care homes exempt from RPDT, but retirement/senior living homes are potentially subject to it. Student accommodation has proven problematic too with differentiation between studio flats (self-contained) and traditional halls of residence that are not self-contained with a kitchen and bathroom. RPDT, having been in the consultation period from April to July, is likely to be announced in some form in the next budget on 27th October 2021 with more precise detail.


The past year has also seen rapidly rising costs of building materials, seemingly a combined impact of Brexit and the COVID-19 pandemic. In March and April 2021 in the wake of lockdown, the construction sector enjoyed a rapid growth in activity leading to increased demand for materials, notably cement, timber, and steel, whilst factories still operated within the repercussions of the pandemic and slower trade with the EU. In turn, this led to an increased cost in building or renovating properties, a factor still prevalent months later. Regardless of this, in late June, Boris Johnson set out aims for improving infrastructure, as a part of more general aims for economic recovery in the UK. One aspect of this was ‘Project Speed’, to be led by the Chancellor. Included in the project was proposed reforms to the planning system, making it easier “to build better homes where people want to live”. That this was met with significant opposition, particularly from countryside areas, would suggest a general lack of support for the proposal. Even more significant was the Conservative party defeat in the Chesham and Amersham by-election, where the Liberal Democrat victory was seen partly as a consequence of the proposed planning reforms. Notably, Liberal Democrat party leader Ed Davey said the victory would be “a massive mandate for those of us who were campaigning against the planning reforms”. According to press comments on the 11th of September 2021, there is speculation that the planning reforms proposed will be abandoned due to the backlash from Southern voters and MPs, with the Chief Executive of the Council for the Protection of Rural England (CPRE) commented that if correct, “some of the most damaging proposals of what was a top-down developers’ charter have been rightly binned”, but a more formal announcement of the position is awaited.


Regardless of the validity of the objections to the planning reform proposals, failure to proceed with these, combined with higher material costs, and a proposed tax on construction industry profits, will not help to build the much-needed homes. As of the fifteenth of September, Robert Jenrick is no longer Secretary of State for Housing, Communities and Local Government, having been replaced by Michael Gove in the cabinet reshuffle. There is speculation that this may indicate a determination on the part of the government to force through the planning changes, or it may be a sign that some form of accommodation with Conservative backbench concerns is being considered. RPDT will apply to the construction of starter and affordable homes; for young people, as well as others struggling to get on the property ladder, the prospect of owning a home only further diminishes.


 

Written by Frances Rigby

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