In this blog we look at the current structure of the residential property tax (RPDT). Separately, we blogged about the triggers for liability. This blog is based on the current bill of September 20th. The final form of the tax has not yet been determined and will be announced in the budget on October 27th (together with the rate). An important standout element is whether the tax extends to the Build-to-Rent (BTR) sector, which is currently under scrutiny by HM Treasury.
Who is liable?
The RPDT Payer is a corporate residential property developer who conducts residential property development activities in relation to UK land. The developer must be subject to UK corporation tax for RPDT to apply.
As explained in our blog on liability triggers (here), the definition of residential development activities is broad and includes obtaining building permits, marketing, and dealing with or building real estate. Significantly, the developer or a “related party” must have or have had an interest in the land, so RPDT does not apply to third party developers. This can lead to different treatment between owners who develop themselves and those who use third-party providers. In addition, the property shares must be part of the commercial portfolio (a term defined in the draft law).
How is the tax currently structured?
The tax applies to profits made Residential Property developments that arise on or after April 1, 2022. In a scenario with mixed land use, it only applies to the profits from the residential part.
The tax applies to corporation tax trading profit as adjusted (the “Adjusted Trading Profits”) and after application of the RPD loss rules. Starting with corporate tax to determine RPD profit, this should provide some simplicity. The adjustments delete these features, among other things: Profits from non-resident activities, any interest expenses (tax-deductible interest is added back) and any corporate tax losses and capital deductions. In particular, HMRC disagreed with the many requests to exclude interest expense from the adjustment, so this is bad news for high leverage businesses.
Elsewhere there is some complexity (but fairness) in the proposed RPD loss rules. There are a number of rules that allow RPD losses to be used against RPD gains and RPD losses to be offset through group settlement (either ongoing RPD losses or losses carried forward). There are many similarities to the corporate tax loss rules, including a rule that limits the use of RPD loss carryforwards to only 50% of RPD profits.
The tax is levied on all RPD winnings that exceed an annual tax exemption. The tax allowance is intended to ensure that only large housing developers are taxed. Although Â£ 25m was mentioned in the consultation document, the allowance is not specified in the draft law. We assume that the amount will be announced in the budget alongside the course. There are rules for assigning an award to group members and a standard provision applies when no group member has been nominated for the award. (Unusually, there are provisions dealing with the allocation of allowances between joint venture members and joint venture companies, which we discuss below).
How are joint ventures dealt with?
There was an ambiguous reference to joint ventures in the consultation document. HMRC is now much clearer in its joint venture proposals.
The draft law affects joint ventures in three ways.
First, a joint venture company is treated as âaffiliatedâ with a joint venture developer who owns at least 10% of the shares in the company. This means that the RPDT can apply when a joint venture company has an interest in the land while a joint venture member is developing it. This extends the definition of related companies and persons beyond a group.
Second, a joint venture company’s RPD profits are allocated to a developer with at least a 10% stake (and subject to the RPDT) if the joint venture company is closely held and RPDT does not pay because its profits are below its allowance fall.
Third, there are provisions for the application of the tax exemption when a member of a joint venture is exempt from corporation tax.
There are anti-foresting rules that apply if a person tries to bypass the RPDT by accelerating their profits so that they fall within a billing cycle that ends before April 1, 2022. The rules try to prevent such agreements from working.
Administration of the tax
The RPDT is treated like a corporate tax amount. It is payable in relation to a creditable accounting period for corporate tax purposes. A number of administrative regulations that apply to corporate income tax also apply to the RPDT. A person making a payment from RPDT must notify HMRC of the payment in order for HMRC to pursue the tax.
HMRC listened to a number of comments during the consultation, such as:
- use the trading profit as the starting point for calculating the RPDT for corporate tax purposes, and
- except for student residences (which are expected to require employment of at least 165 days per year) and nursing homes of various types.
Elsewhere, the rules for RPD losses are complex but fair where the profits fluctuate from year to year and are at least known.
Important points are the tax rate, the tax exemption and whether it applies to BTR.