UK property developer tax: student accommodation excluded but build-to-rent still included

According to draft legislation published for consultation, however, build-to-rent developments have not been excluded from the new tax, despite calls from the British Property Federation (BPF) for it to be.

The BPF said it would be “unfair” to levy RPDT on build-to-rent developers to enable remediation work in the homes-for-sale market, given that build-to-rent investor-developers remain fully liable for remediation work and costs are not passed on to renters.

RPDT is one of the measures designed to contribute to the costs of the government’s plan to remove unsafe cladding from leased residential buildings. The government launched an initial consultation into the design of the tax in April.

The treatment of student accommodation was a particular concern when the proposals were first consulted upon, according to Richard Croker, a property tax expert at Pinsent Masons, the law firm behind Out-Law.

The draft legislation provides that student accommodation buildings will be excluded from the tax if they are designed or adapted, or being constructed or adapted, for use by students or school pupils and it is reasonable to expect that the building will be occupied by students or school pupils on at least 165 days a year.

“It is good news that the government has opted to exclude student accommodation in a broad and straightforward way,” said Croker. “The previous consultation suggested it was considering distinguishing between different types of accommodation so that studio flats would be within the tax but traditional halls of residence would not be.”

“However, build-to-rent now also needs to be excluded as it makes no sense for this sector to contribute to cladding remediation costs incurred in relation to the homes-for-sale market,” he said.

RPDT will apply to the residential property development profits of companies that undertake UK residential property development activities. Tax will only be charged on profits exceeding an annual allowance. The figure for the allowance has not been confirmed, but the earlier consultation suggested a figure of £25 million.

RPDT will only apply to companies which have or had an interest in the land concerned.

The tax will also only apply to companies which are subject to corporation tax and so will not apply to charities such as housing associations or to the property rental business profits and gains of real estate investment trusts (REITs).

“Taxable subsidiaries of charitable housing associations will be within the scope of the tax, except to the extent that they are able to gift aid their profits from such activities,” Croker said.

“Sales of land with planning permission for residential development will be within the charge along with profits from development, but there does not appear to be a reason for thinking that unrealised profits from planning gain will be subject to RPDT,” he said.

The tax on the residential property development profits will be charged as if it were an amount of corporation tax. However, the method of calculation is different as finance costs are not deductible. The rate of the tax has not yet been announced.

Residential care homes will be excluded from RPDT if personal care is provided. However, senior living developments will be within the scope of the tax.

The draft legislation contains anti-forestalling measures designed to prevent developers from avoiding RPDT by accelerating profits so that they arise in an accounting period ending before 1 April 2022. The measures apply to arrangements entered into on or after 29 April 2021 that have a main purpose of securing a tax advantage resulting from the profits not being taken into account for the purposes of RPDT. If anti-forestalling applies, the profits will be treated as arising in the developer's first chargeable period ending on or after 1 April 2022.

The closing date for comments on the draft legislation is 15 October 2021. The legislation is to be included in the 2022 Finance Bill and final details about the tax are expected to be announced in the UK chancellor’s budget announcement scheduled for 27 October.