A new temporary tax on profits derived from UK residential property development activities was introduced with effect from April 2022. The objective of the tax is to help fund building safety remediation works, including dealing with unsafe cladding in high-rise buildings.
The new tax is called ‘residential property developer tax’ or RPDT and will be charged at a rate of 4% of developers’ profits exceeding a set allowance.
RPDT will only apply to profits arising from the development of residential property held as trading stock by the developer or a related entity. Property investors are specifically excluded from the tax. Furthermore, some properties, such as hotels, student accommodation and care homes providing personal care are excluded from the definition of ‘residential property’.
Standalone companies will have an annual allowance of £25 million per annum, such that the 4% tax will only apply to profits in excess of this amount. For groups of companies (with 75% common ownership), the £25 million allowance will be equally split amongst all entities unless an election is made to allocate the allowance on a different basis.
For example, a group of 10 companies would each automatically have a £2.5 million allowance. If, say, only one of those group companies is potentially subject to RPDT and has profits of £4 million for the year, it would be subject to £60,000 tax (e.g., on the additional £1.5 million profits above its £2.5 million share of the allowance, charged at 4%) without any election.
The group could, however, instead nominate a group company and prepare an allowance allocation statement setting out how the allowance should be allocated across the group. In the example above, the entire £25 million allowance could be allocated to the developer company meaning that there would be no RPDT to pay.
RPDT will be payable in line with corporation tax deadlines and so will be subject to quarterly instalment payments for companies within the regime.
If you would like further information as to whether your company or group may be subject to the rules, please do get in touch with your usual tax contact.