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Cladding tax update

On 10 February, Robert Jenrick MP announced a number of measures in respect of the funding of cladding remediation works, a topic which was brought to the fore following the tragedy of Grenfell.

Part of that announcement was in respect of the introduction of two new taxes; (i) a general developer tax, and (ii) a levy for high-rise residential developments, both of which would be used to raise finances specifically to fund remediation works.

A consultation has now been published in respect of the first of those two taxes, and this note sets out (in Q&A form) some of the key features.

What is the new tax called?

The government is referring to the new tax as the Residential Property Developer Tax (RPDT).

When is it being introduced?

The intention is for the tax to be introduced with effect from April 2022.

Who will the RPDT apply to?

As is evident from the name, it is intended to apply in respect of residential developments – more specifically, it applies where a company makes a profit as a result of undertaking residential property development activities. What constitutes residential development is fairly broadly defined.

The government has indicated that only larger residential property developers should be targeted by the tax. In practice, this is implemented through an annual allowance of £25m, and any profits falling under this threshold each year will not be taxed.

Certain communal dwellings, such as residential homes for children, will be carved out of the scope of the tax.

How will the RPDT be calculated?

As above, the tax will be calculated on profits (in the same way as UK corporation tax is applied). As to how it will be applied in practice, the consultation sets out two different approaches.

What are the two different approaches that have been suggested?

The first suggestion is a company-based approach. Each company in a group would be assessed, to see whether it carries out “more than insignificant” residential development activities. If the “significance” threshold is exceeded, all profits of the company would be subject to the RPDT, regardless of whether those profits arose from residential development (there would be no apportionment).

Profits would be calculated in line with the company’s wider corporate tax liability, with some adjustments specific to calculating the RPDT liability.

The second suggestion is for profits from residential development to be calculated on an activity-based approach, as a separate division. The consultation sets out two different ways that this could be achieved, but the key difference from the first suggestion is that the profits taxed would be by reference to activity rather than the entity they arise in.

This activity-based approach may also effectively require a separate set of accounts to be created in relation to group profits which are specifically attributable to residential property developments, where there is a group which undertakes a mix of development activities.

Are there any residential developers which will be exempt from the RPDT?

Tax-transparent vehicles such as partnerships won’t themselves be subject to the tax, although the members likely will be.

It also shouldn’t impact developers who don’t make a profit (such as in relation to cost-only development, as is often the case for social housing developments), and entities with profits which  are generally exempt as a result of charitable activities.

These carve-outs will no doubt have to be considered relatively carefully when the tax is implemented.

What is the rate of tax going to be?

There is currently no indication as to what the rate of tax will be for the RPDT. The government has confirmed that the rate will be set by reference to the amount of revenue it is (in conjunction with the levy) intended to raise, which is £2bn.

Is the RPDT time limited, or is it intended to be a long term measure?

The tax is to be time limited, such that it (in conjunction with the levy) will raise at least £2bn over the next ten years. However, this ten year longstop isn’t absolute, and is potentially subject to change. The key metric for the government is raising that £2bn figure, not the longstop date.

Is there anything else I should be aware of?

Yes, plenty… but some of the finer technical details of the tax will only become apparent after the consultation has ended, and the government has fed back on the responses. For example, how the RPDT interacts with the use of losses (carry forward and group losses) and further details as to how it applies to arrangements such as joint ventures will be of interest.

We will be monitoring progression of the RPDT and will provide further updates as and when we receive further details.


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