The costs of cladding - UK Treasury comes down hard on developers with new residential property tax

The government’s response to the cladding crisis has been mixed and at times confusing. A commitment to fund necessary repairs was caveated by the obvious need to raise new revenue to cover these costs, with estimates for this ranging from £5bn to £15bn.  Two key levies had been proposed and presented at recent consultations – a new tax on residential property developers, and a new Building Safety Levy linked to building regulation controls on the construction of tall buildings, and we reported on these previously in February, May and September of this year (see Related Materials). In the Autumn Budget, the Chancellor revealed the tax rate and allowances for the residential property developer tax, which comes into force from April 2022, and the government has also published its response to the technical consultation.

The headline rates

The residential property developer tax will impose a 4% tax charge on residential property developers (RP Developers) in relation to residential property activities (RPD activities). It covers any company, and can include group companies, with provisions included to address joint ventures, but is limited to those showing profits greater than £25m. The government confirmed an approach which is based on calculation of corporation tax profits specific to the RPD activities.  

Who is liable?

The tax will be payable by RP Developers being those ‘within the charge to corporation tax’ who undertake RPD activities in relation to UK land. Following vocal reaction to the draft legislation, the government has now confirmed that the RPD tax will not apply to Build to Rent (BTR) developers although it will keep this under review. It is also not applicable in relation to institutional uses, care homes or student accommodation, or in relation to activities which are considered charitable. However, the consultation response confirms that extra care housing and housing with support (assisted living) will not be exempt, as it is considered more akin to mainstream residential dwellings.

Has anything else changed since the end of the consultation?

There have been minor amendments to clarify what is meant by residential property, which will include buildings designed, converted or adapted for residential use (although this will exclude refurbishments). The definition also includes land intended for residential development where planning permission is being sought or has already been granted, or where construction of residential property is in progress. Further detailed guidance is to be published to provide additional clarity.

What else is expected?

The consultation response noted concerns raised over the scope and potential overlap between the RPD tax and the proposed Building Safety Levy (also referred to as the Gateway 2 Levy). While we await the full consultation response and details on this additional levy, it is clear that the Treasury see these as sufficiently distinct, and necessary, to tackle the cladding crisis.  One is a tax on profits, and the other a single, one-off payment charged on the development of higher risk tall buildings. We now await the full response.

As part of ‘Planning for the Future’, the Planning White Paper had also proposed the abolition of section 106 agreements in favour of a new flat rate Infrastructure Levy.  This could add further costs to development activities. We can only speculate that amongst the 44,000 responses to the White Paper, many queried and challenged this proposal as Michael Gove MP,  the newest Secretary of State of the re-branded Department for Levelling Up, Housing and Communities, has made clear (well almost made clear) that planning reforms (which would include any new Levy) are not expected any time soon.  Another ball kicked into the long grass while the government carries out a complete rethink. 

Looking ahead

Further guidance and clarifications will be provided by the government, but this new developer tax is now a reality, which will become part of the costs of residential development from April 2022. Residential developers and investors will need to look carefully at their current and future activities to assess the immediate and longer-term impact.  In doing so, one eye must also be kept on the Building Safety Levy and how this could influence the way in which certain developments might be approached.

Authored by Robert Gowing.