Complexity and cost to come for residential property developers and investors – The Property Chronicle
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Complexity and cost to come for residential property developers and investors

The Analyst

Following the tragic events at Grenfell Tower in June 2017, the UK Government signalled its intention to end the unsafe cladding of highrise residential buildings, providing funding of over £5b to date, towards the cost of replacing such cladding. 

As part of these efforts, on 10 February 2021, the Ministry of Communities and Local Government set out its plan to bring an end to unsafe cladding, provide reassurance to homeowners and support confidence in the housing market: 

  • The Government will pay for the removal of unsafe cladding for leaseholders in all residential buildings 18 metres (six storeys) and over in England; 
  • A finance scheme for leaseholders in lower rise, lower-risk buildings – those between 11 and 18 metres (four to six storeys) – to help pay for cladding removal where it is needed and ensure leaseholders never pay more than £50 a month towards the costs;
  • A new building safety regime to ensure a tragedy like Grenfell never happens again.

Funding the policies

With these measures funded via a new industry levy (the Gateway 2 Developer Levy) and a new tax on residential developers, with the goal of ensuring that developers “play their part and make a fair contribution”.

On 29 April 2021, HM Treasury released a consultation on the second of these two revenue-raising measures, a new Residential Property Developer Tax (RPDT). This tax is set to apply from April 2022, with the policy goal of raising approximately £2b over the course of a decade. 

Importantly, the new tax is currently proposed to target not only developers who have had cladding issues themselves and those developing highrise buildings (although the new industry levy will), but all residential property developers over a certain size. 

In the consultation, the Government says that the largest residential developers are operating in a market that benefits from the substantial amount of funding the government is providing to address building safety defects. The Government has also helped support confidence and liquidity in the residential property market with its recent interventions on stamp duty land tax and the mortgage guarantee scheme. Therefore, the Government considers it is right to seek a fair contribution from the largest developers in the residential property sector towards these costs. In practice, however, the tax may have a wider net than expected, for reasons we discuss below. 

The consultation on RPDT ends on 22 July 2021. BDO LLP will, of course, be responding. However, the consultation document is, at present, silent on several key characteristics of this new tax. Most notably, the rate of tax applicable under RPDT has not yet been determined. 

The scope of RPDT

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