A Complete Guide on Residential Property Developer Tax

The Residential Property Developer Tax (RPDT) is levied on the earnings of businesses engaged in the development of residential properties. This tax applies to profits generated in accounting periods concluding on or after 1 April 2022.

The government has introduced this tax to ensure that the largest property developers make a justifiable contribution towards covering the government’s expenses related to cladding remediation.

The RPDT is levied at a rate of 4% on the portion of Residential Property Developer profits exceeding its allowance of £25 million for that period. This tax is calculated and imposed as if it were a sum of corporation tax owed by the developer.

Taxpayers will need to identify their residential property development activity, and the tax would apply to the amount of profits in a company that relates to that activity.

Residential Property Developer

Residential Property Developer is a company :

•  That is within the charge to corporation tax
•  Undertakes residential property development activities (“RPD Activities”) and
•  It is not a non-profit housing company.
• Who, individually or in conjunction with a member of its affiliated group, possesses a significant stake in a joint venture firm operating as an RP developer.

Non-profit housing companies need to be understood in reference to social housing legislation in various parts of the United Kingdom. Additionally, wholly-owned subsidiary companies of a non-profit housing company are exempt from being classified as residential property developers for taxation purposes.

However, non-profit organisations engaged in constructing residential properties with the aim of generating funds to advance their charitable objectives will be subject to RPDT.

“Substantial interest” refers to a stake of 10% or more in the ordinary share capital of a relevant joint venture company, taking into consideration the holdings of all group members.

If a joint venture company lacks ordinary shares, a significant interest is defined as a beneficial entitlement to at least 10% of the profits distributable to equity holders.

Residential Property Development Activities

The residential property development activities include:

• Dealing in residential property;
• Designing it;
• Seeking planning permission in relation to it;
• Constructing or adapting it;
• Marketing it;
• Managing it;
• Any activities ancillary to any of these other activities.

If a developer designates one group company to handle project management and another group company to handle sales and marketing, the profits generated by these group companies will fall under the scope of RPDT.

These group companies will be considered developers in their own capacity, as they are part of the same group as the developer who possesses the land interest in the development site.

Profits generated from first tranche sales of shared ownership homes and sales of uncompleted developments by a developer may fall in scope of the RPDT if they have an interest in the land being developed and have made CT trading profits from those activities.

However, the activities performed by the below sector fall beyond the scope of RPDT.

• Third-party contractors,
• Commercial property developments and
• Residential development outside the United Kingdom

RPD activities- interest in land

The concept of having an interest in land applies to both the developer company and any affiliated companies connected to the developer. This definition of land encompasses not only the physical land itself but any buildings or structures on it.

It covers all scenarios where a developer possesses or has possessed a beneficial stake in the land, which is part of their trade’s inventory.

In this context, trading stock includes any estate, interest, right, or authority related to the land, which will be sold as part of the regular course of business.

This ensures that when a developer company has or has a stake in land, the tax calculation encompasses Residential Property Developer profits from any linked companies engaged in the land’s development.

Joint venture (JV) companies are considered in cases where the Residential Property Developer or a member of the same corporate group as the developer holds a 10% or greater stake in the JV company.

It’s important to note that individuals or entities acting solely as mortgage holders or those with a mere license to occupy or use the land are excluded from being regarded as holding an interest in land.

RPD activities: Residential Property

The term “residential property” includes buildings that are specifically designed or modified for use as dwellings. It also includes land earmarked for development where there is an application for planning permission or where such permission has already been granted for residential property development.

Additionally, land on which residential properties are currently under construction falls within this category.

Exclusion from residential Property- Excluded Buildings

These exclusions typically comprise specialised institutions that provide temporary or long-term accommodation for a particular group of residents, as well as buildings occupied solely under a license agreement by occupants who do not possess any enduring property rights over the premises.

• Student accommodation: Apart from school boarding houses or university halls of residence, the exemption also extends to other purpose-built student accommodations (PBSA). This exemption applies to PBSA, where students typically reside during term time for a minimum of 165 days each year.
• Retirement accommodation: The exclusion covers care homes and other institutions that provide personal care to people requiring it by reason of old age, disability, etc. It does not provide a general exclusion for purpose-built dwellings that are intended for occupation by people of retirement age, whether as owners or tenants.
• Residential accommodation: Exemptions for residential accommodation for members of the armed forces and emergency services or hospital workers are limited to housing that is explicitly designed or modified for the use of these personnel and is provided as a result of their employment.
• Corrections and Adjustments: If any errors or omissions are identified in previously submitted FPS reports, employers can make corrections or adjustments by submitting additional FPS reports. This helps rectify inaccuracies and keep the payroll records up to date.
• Temporary sheltered accommodation: The developers building house intended for short-term refuge or similar sheltered living arrangements, any profits from such buildings will not be subject to RPDT. This provision applies to buildings that provide temporary shelter to individuals in need, such as those escaping domestic abuse, facing homelessness, or other similar situations. However, it does not apply to ‘sheltered housing’ designed for long-term residence by elderly individuals.

Other excluded buildings would include:

•  a hospital or hospice;
• a prison or similar establishment;
• a hotel or inn or similar establishment;
• a monastery, nunnery or similar establishment

RPD activities: Build to Let Properties

Generally, Build to Rent often referred as Build to Let (BTL) or B2L activity is not in scope of this tax as they operate on a different model to build-to-sell developers and realise returns over a longer timeframe rather than at the point of completion of the development.

The question whether property development intended for renting to residents, rather than selling to them as part of a business activity, falls under the purview of RPDT  hinges on whether the development is carried out by the property owner (landlord) or by a separate developer who intends to sell the completed development to the landlord.

A build-to-rent property investor who retains the property for long-term investment purposes falls outside the scope of RPDT, even if they are involved in the property’s development. Any profit from a future sale of the property will not be subject to the new tax.

However, if the property was developed by a group company with the intention of selling it to an investment company, then the trading profits of the group property will be subject to the tax.

RPD profit or loss

The basis for calculating the Residential Property Developer Tax (RPDT) for a given accounting period is the adjusted profits or losses of the company. This calculation also includes any profits or losses related to residential property development from joint ventures that can be attributed to the company.

The final amount subject to taxation is then adjusted by taking into account allowances, specific losses, and other forms of relief.

Residential property developer profits or losses 

The exclusion of finance costs from the calculation of RPDT profits is a significant factor, and it’s likely to result in developers being subject to RPDT even if they had previously believed they would stay within the allowance.

Further, carried forward losses or surrendered losses can’t be utilised unless those losses originate from residential property development.

Adjusted trading profits and losses

The company’s trading profits and losses need to undergo adjustments to determine the adjusted trading profits or losses for Corporation Tax purposes. This adjustment excludes profits, losses, and capital allowances unrelated to residential property development activities.

Additionally, it excludes considerations related to loss relief and group relief, as well as amounts incorporated in calculating trading income due to the operation of the loan relationship and derivative contract regulations.

Furthermore, any trading profits from residential property development activities conducted by a charitable company and allocated for the charitable company’s objectives are disregarded. In other words, such profits are not considered in the tax calculations.

Attributable joint venture profits and losses

Determining Joint Venture (JV) profits or losses for calculating Residential Property Developer (RPD) profits or losses involves specific rules. When a developer holds a 10% or higher stake in the JV company, the profits of that JV are attributed to the RP developer.

If there are losses to be attributed to a developer, both the developer and the JV company must inform HMRC within two years from the end of the developer’s accounting period for which those losses are to be associated.

The amount of RPD profits or losses attributed to a developer is calculated as a percentage of the JV company’s profits available for distribution to the developer.

In cases where the JV company’s and the developer’s accounting periods have different end dates, profits, losses, and allowances are apportioned based on the time frame in line with the developer’s accounting period.

It’s worth noting that the amount of losses in the JV company that can be carried forward to future accounting periods or surrendered to a group company is reduced by the portion attributed to the JV member, which is the developer.

Reliefs for Losses

An unutilised loss can be carried forward to offset against RPDT profits in the subsequent accounting period. When a company possesses an RPDT loss that hasn’t been relieved otherwise, it can transfer that loss to another company within the same group. It’s important to note that there is a restriction on the portion of a:

• Allowable RPDT loss relief which the RP developer is given for the accounting period (C )
• Allowable RPDT group relief for carried-forward losses  claimed by the RP developer for the accounting period (E)

The restriction aligns with the standard carry-forward regulations, meaning that when RPDT profits exceed the £25 million allowance, the relief granted cannot exceed 50% of the chargeable RPDT profits.

Hence, the Maximum RPDT reliefs for an accounting period is :

Where ;

A= RP developer’s adjusted trading profits/(losses)

B= Joint venture profits/(losses)

D= Allowable RPDT group relief claimed by the RP developer for the accounting period

Z=  Amount of allowable RPDT group relief

The total amount of losses available for M to carry further forward is now M’s own losses £20m – £2.5m = £17.5m plus losses surrendered by O of £40m, giving a total of £57.5m.

Allowance for Residential Property Developers

The allowance is subtracted from the profits subject to the Residential Property Developer Tax (RPDT). RPDT is imposed on profits that exceed a company’s designated allowance.

When an RP developer is the allocating member of a group of companies, it is granted an annual allowance of £25 million for its accounting period. This allowance is adjusted proportionally if the accounting period is shorter than a year.

If an RP developer is a receiving member within a group of companies, it receives an annual allowance equivalent to the amount allocated to it by the allocating member.

For RP developers in a group without an allocating member, the allowance is calculated as annual allowance divided by the number of companies that are part of the group at the conclusion of the accounting period of the group’s ultimate parent company. Similar to other cases, this allowance is adjusted proportionally if the accounting period is less than one year.

RP developers not affiliated with any group receive an annual allowance for their accounting period, with adjustments made if the period is shorter than a year. The designation of an RP developer as the allocating member in a group is determined according to the relevant regulations.

Similarly, a receiving member can only claim an allowance allocation as specified in an allowance allocation statement issued under the relevant regulations.

The HM Revenue and Customs have the authority to create regulations governing the nomination of an RP developer as the allocating member in a group, altering the allocation within a group, and the submission of an allowance allocation statement.

Collection, management and payment of tax

• its RPD profits
• its adjusted trading profits or losses
• the amount of any attributable profits or losses from joint ventures
• any allowable RPDT loss relief
• any allowable RPDT group relief
• any allowable RPDT group relief carried-forward
•  the allowance allocated to it

HM Revenue and Customs (HMRC) collects and manages RPDT. RPDT is integrated into the procedures for quarterly instalment payments and group payment arrangements.

A residential property developer must report their RPDT details on their company tax return. However, this obligation does not apply if, under the circumstances, it is reasonable to assume that the residential property developer will not have an RPDT liability, provided there are no factors such as loss relief, group relief, or carried forward group relief that would affect this assessment.

Requirement to provide information about payments

Companies that are required to pay Residential Property Developer Tax (RPDT) must furnish HM Revenue and Customs (HMRC) with details regarding the payment. This is essential for the tracking and monitoring of tax receipts.

The company making the payment could be the RP developer itself, or a separate company under a group payment arrangement. Where payments are made under group payment arrangements, there is no need to specify the allocation to each company at the time a quarterly payment is made. An allocation to individual group companies’ RPDT liability will be required in due course, as for Corporation Tax.

If a Residential Property (RP) developer has an RPDT liability and makes a payment, or if a payment is made on their behalf that covers all or part of that liability, the RP developer must inform an HMRC officer in writing.

This notification should be made on or before the date when the payment is executed, and it should specify the portion of the payment that corresponds to RPDT.

Failure to provide information about RPDT payments can therefore lead to a penalty calculated with an initial penalty of £300 followed by daily penalties of up to £60.

Non-profit housing companies: exit charge

The exit charge comes into effect when a company that is a non-profit housing company stops being one without having fully transferred all its assets to another non-profit housing company.

The company will not be considered a non-profit organisation during the accounting period in which exit charge is applied.

During this period, its Residential Property Developer Tax (RPDT) profits will encompass the earnings attributed to its residential property development activities, as well as those of its wholly owned subsidiaries, for the four-year period leading up to the day it ceases to be a non-profit company or the day it ceases to be wholly owned by such a company.

Assuming the full annual allowance would have been available, in its APE  31 December 2028 M will incur an exit charge of £15m. This comprises the RPD profits of N that exceeded the available allowance in the four-year period from 1 July 2024 to 30 June 2028: £5m for APE 31 December 2025 and £10m for APE 31 December  2027. No further allowance is due so the RPDT payable at 4% gives a charge of £600,000.

The charge will not be payable if all of the assets of M are distributed to a non-profit provider by 31 December 2029. or such longer period as HMRC may allow.

Anti-forestalling: accelerated profits

RPDT is a form of Corporation Tax, which means that all the measures designed to prevent tax avoidance in Corporation Tax, such as the General Anti-Abuse Rule (GAAR), also apply to RPDT.

Additionally, the RPDT legislation contains a particular provision aimed at thwarting schemes that attempt to shift profits subject to RPDT to periods before the tax took effect on 1 April 2022.

An anti-avoidance provision prevents taxpayers from adjusting their profits arising in an accounting period to obtain a tax advantage for the purposes of the residential property developer tax (RPDT).

Groups

A group comprises a parent company and its subsidiaries, where the parent company owns at least 75% of each subsidiary. A company (“A”) is the “ultimate parent” of another company (“B”) if A is the parent of B, and no company is the parent of both A and B.

For example, 

A company referred to as “A,” is considered the “parent” of another company, referred to as “B,” under the following conditions:

(a) When company B is a 75% subsidiary of company A.

(b) When company A has a beneficial entitlement to at least 75% of any profits that can be distributed to equity holders of company B.

(c) When company A would have a beneficial entitlement to at least 75% of any assets that can be distributed to its equity holders in the event of the winding up of company B.

Four Key Criteria for RPDT

From the above discussion in order to determine whether a company qualifies as an RP developer and, as a result, whether its activities (or the activities of other members within its group) fall under the scope of RPDT, four key criteria need to be considered:

• Is the company subject to UK Corporation Tax?
• Is it engaged in activities related to the development of residential property in the UK as part of its trade or in support of a trade conducted by the company or a member of its group?
• Does the company or a member of its group have an interest in the land being developed, either directly or through holding a significant stake in a relevant joint venture company, which will later be disposed of within the course of that trade, except for excluded interests?
• Does the development activity pertain, at least partially, to residential property, except for properties explicitly excluded from RPDT?

Conclusion

The tax calculation for RPDT begins with the company’s CT trading profit or loss for a specific accounting period. This figure is then adjusted to exclude profits, income, losses, and other deductions or allowances unrelated to the residential property development trade.

Further adjustments are made to exclude finance income or costs, resulting in the determination of RPD (Residential Property Developer) profits. Companies not liable to pay CT or companies that do not conduct a trade subject to CT are not subject to RPDT.

The rate of RPDT is set at 4%. RPDT is collected and treated as an amount of Corporation Tax. All the standard rules and procedures applicable to Corporation Tax apply, as appropriate, to RPDT.