Residential property developers tax: How might this impact the retirement living sector?
The residential property developers tax (RPDT) is being introduced with effect from 1 April 2022, with the stated aim of having the private sector contribute to paying for the remediation of unsafe cladding following the Grenfell tragedy. According to a consultation paper published on 29 April this year, the intention is to ensure that only the largest residential property developers are caught and in a way that will raise sufficient revenue to achieve the aggregate revenue target of £2 billion within a decade.
Following a consultation on the design of the tax, draft legislation was published on 20 September, with the government holding a further technical consultation on the details of the rules. A response to the original consultation was published as part of the Autumn Statement on 27 October. With key details only just being clarified (including the rate of 4%), the 1 April 2022 introduction date looks very challenging for affected taxpayers.
Design of the tax
The RPDT will be charged on companies carrying out residential property development activities in the UK which generate relevant profits in excess of an annual allowance of £25 million.
Companies within the scope of RPDT will be required to identify and apportion profits from their residential property development activities. The range of activities which fall within the scope of the tax is broad and can include (for example) seeking planning permission, though the company (or a group company) must own or have owned an interest in the land in question in order to be caught.
No finance costs (e.g. interest) can be taken into account in identifying RPDT profits, which the government says will prevent distortions of the tax base for RPDT.
Will developers in the retirement living sector be affected?
The government previously stated that there is a need to consider the treatment of different forms of retirement accommodation where varying levels of care provision may be included. Specifically, the government was minded to include profits generated from development of retirement communities that offer accommodation and communal facilities for older persons that are not reliant on care provision within the scope of the tax. This is in comparison to traditional nursing homes where care is an integral part of the communal dwelling, which were proposed (in the original consultation document and the draft legislation) to fall outside the scope of the tax.
This position has been clarified further in the response document. Most respondents to the original consultation felt that all retirement housing (i.e. including extra care housing, housing with support and affordable retirement housing) should be excluded from the scope of the RPDT, citing in particular that such accommodation does not compete with conventional residential developments and that the sector was particularly vulnerable due to an undersupply of specialised housing provision and the amount of historical losses suffered by the retirement living sector during the pandemic.
Despite those representations, the government has disappointingly maintained the original position that only care homes will be excluded from the scope of RPDT. This is on the basis that extra care housing and housing with support are more akin to mainstream residential dwellings than communal housing such as care homes. The government therefore considers that a wider exemption for the retirement living sector would create distortions of competition and risk being too complex.
This will be a blow to the wider retirement living sector. The UK retirement village space is still a relatively nascent market compared to other countries and yet it has been growing rapidly in recent years, largely driven by an increase in life expectancy, a mounting focus on wellbeing and a shortage of suitable retirement accommodation. While efforts are being made to address this shortage of suitable accommodation, it has been suggested by some that the new tax may bring about a decline in the supply of retirement living accommodation.
The government appears to be keenly aware that there is the potential for the RPDT to have such unanticipated impacts and in particular to affect housing supply. The consultation paper specifically recognises that if developers factor the cost of the tax into the price they are willing to pay for land this may result in a reduced number of sites viable for development and therefore in due course fewer schemes being completed, although at this stage it is difficult to predict how behaviour may change in response to the tax.
Lenders operating in this sector might want to consider factoring the potential effect of the RPDT into their credit analysis and decision making, albeit based on the limited information available to date.
Will BTR and affordable retirement living housing be caught too?
The diversity of tenure within the retirement living sector is increasing, with many development schemes now featuring build to rent units. The consultation paper originally suggested that the RPDT will apply to such schemes, as well as developers who build to sell, but the government confirmed in the response to the consultation that build to rent will not fall within scope. That is very welcome news for retirement living schemes with build to rent units, although the paper also states that the decision in respect of build to rent will be kept under review, so the relief may be short-lived if the tax does not raise revenue in line with the government’s expectations.
The government has also relented somewhat in its stance on affordable housing, though not as much as many had hoped. Originally, the proposal was that profits from the development of affordable housing would be within the scope of the tax. The response document confirms that the government has decided, following representations made by stakeholders, to implement an exemption from RPDT for non-profit registered providers of affordable housing and their wholly owned subsidiaries.
That exemption will be bolstered by an exit charge, which will apply where a corporate body ceases to qualify for it (e.g. if a wholly owned subsidiary is sold). It is not yet clear how long after completion of the development this exit charge could bite.
Now that the scope of the tax has been confirmed in full, further amended legislation is awaited following the publication of the consultation response on 27 October. Legislation for the RPDT will then be included in the 2021-22 Finance Bill.