Double-whammy for the Residential Development Sector

The Government recently launched a consultation on a new tax to be charged on the largest housebuilders, and the Queen’s Speech (Tuesday 11 May 2021), confirmed the intention to overhaul the planning system, ostensibly to help councils meet the new house-building targets.

James Mottram and Victoria Longmore take a closer look at what both could mean for the residential development sector.

In the Queen’s Speech, the Government also outlined plans to introduce sweeping changes to the planning system, the leasehold system and building safety over the course of the next parliament.

UK Residential Property Developer Tax

Firstly, let’s look at how the new UK Residential Property Developer Tax will work.

On 29 April 2021, the Government published a consultation on the Residential Property Developer Tax (RPDT) that sets out proposals for the design, implementation, and administration of a new tax to be charged on the largest housebuilders.

The plan is for the tax to be introduced from April 2022 (through inclusion in the 2021 Autumn Finance Bill) and to raise at least £2 billion.

It is being introduced in large part to pay for the remediation of unsafe cladding following the Grenfell tower tragedy. However, the Government points out that the tax is industry-wide and not targeted at housebuilders who were involved in buildings requiring remediation.

Unusually, the Tax is very targeted and likely will be limited in time.

We don’t yet know the tax rate, as this isn’t covered in the consultation paper, but it does recognise that many stakeholders will be concerned about the combined effect of the RPDT and the Corporation Tax rate increase from 1 April 2023.

Who will the Tax affect?

• The proposed RPDT will only capture standalone companies or corporate groups, but will take into account profit shares from development activities conducted through joint ventures.
• There will be a threshold so profits are only caught in excess of an annual allowance – suggested to be £25 million, so the burden of the tax will fall on a fairly small number of taxpayers.
• The proposed scope of activities is broad – the tax will catch the conversion of existing buildings and new construction whether for sale or for letting, and apply where a development site is sold in whole or in part.

• The build of rental properties will also be affected, in order to ‘prevent housebuilders adopting alternative business models to avoid the tax’, but how the profits should be computed for the purposes of the tax in this situation is unclear.

The shape of RPDT

The Government is seeking views as to whether it is more appropriate to apply the tax on the basis of a company approach (i.e. companies / groups whose activities include residential property development, as long as it is not insignificant), or an activity-based approach (i.e. taxing residential property development activity of any extent).

In the first, the entire profit of the company would be taxed, but in the second, only the residential property development activity would be taxed.

Whichever approach is adopted (if any), the Government seems to be aware of the potential for RPDT to affect housing supply. If developers factor the cost of the tax into the price they are willing to pay for land (which is inevitable), this may result in a reduction in the supply of land as landowners will have certain expectations on the value of their land. In order to maintain supply, housebuilders may need to be creative and find efficiencies elsewhere. A potential efficiency could be created if planning rules are relaxed reducing costs expended on obtaining planning and reducing the lead in time to start developing sites. Will the proposed changes to the planning regime achieve this? (see below)

Housing Planning Rules

The second significant development for the residential development sector outlined in the Queen’s Speech is confirmation of the Government’s intention to introduce a Planning Bill following last summer’s Planning for the Future white paper.

According to the policy paper which accompanied the Queen’s Speech: ‘The Planning Bill will create a simpler, faster and more modern planning system, ensuring homes and infrastructure can be delivered more quickly across England’.

Whilst details are still awaited, the policy paper confirms that the changes will include:
• replacing the system for funding affordable housing and infrastructure through the introduction of a new levy;
• significantly decreasing the time it takes for developments to be processed through the planning system;
• overhauling local plans so they provide more certainty on what type of development will be permitted on different categories of land (referred to by some as ‘zoning’).

The white paper set out the government’s proposals for simplifying the planning system, and has been hotly contested by all factions of the residential property sector. But the changes mooted in the radical overhaul will speed up the planning process and help councils to meet new house-building targets, according to Government Ministers.

It represents the biggest shake-up to the planning system in 70 years.

It takes an average of five years for a typical housing development to be passed fit for development. The government wants the country to build 300,000 new homes a year – more than the 192,725 homes it built last year. So, in growth areas, current planning restrictions will be largely swept away to speed up construction.

Already broadly welcomed by housebuilders, the Planning Bill is expected to reduce the ability of local councils to scrutinise individual planning applications on land approved for development.

Let’s hope the Planning Bill and the Residential Property Developer Tax serve to support the sector, fuel job creation, and drive economic recovery.

Lodders’ Real Estate team

James Mottram and Victoria Longmore are Partners in Lodders’ award-winning and top-ranking Real Estate practice that is one of the largest in the West Midlands, with 32 specialist Real Estate, Commercial Property, Planning, Construction, and Highways legal experts.