Treasury launches new residential property developer tax

• UK government launches new residential property developer tax
• The new tax for UK residential property developers is part of a wider GBP 5BN cladding remediation scheme
• What is property development, and what does a property developer do?
• How to become a property developer and get into property development

Earlier this month, the UK government launched a consultation on its previously announced Residential Property Developer Tax (RDPT) to raise a minimum of GBP 2BN over the next ten years to tackle the cost of cladding remediation.

The new residential developer tax will help pay for the removal of unsafe cladding on high-rise residential buildings, with the Grenfell Tower disaster acting as the catalyst for ramped up plans to tackle the issue.

It will be delivered alongside a Gateway 2 developer levy, which will be added when property developers apply for permission to develop specific tall residential buildings in England.

Treasurer Rishi Sunak proposed the new RDPT apply to conversions and new builds as well as existing structures.

The tax change, which many anticipate will be introduced in 2022, is also part of a wider GBP 5BN cladding remediation package and would apply to Britain’s largest property developers with annual profits above GBP 25M.

The consultation, which seeks views on the design, application and regulation of the new tax, will close on July 22nd 2021.

While the government is consulting on the design of the tax and its inclusion, officials have suggested that the definition of residential property will be something akin to that used for the stamp duty land tax, with a few additions.

According to the latest reports, the tax will also apply to residential property on any undeveloped land or terrain undergoing construction, with planning permission to build residential property has been obtained.

The new developer tax will apply to a broad definition of “property”

While the British government decided to propose an expansive definition of “property development”, the tax will not apply to businesses whose activities are entirely disconnected from Britain’s residential property development market.

Those subjected to the new changes will find peace in mind knowing that the Treasury has taken measures to ensure the tax burden remains stable over the next few years and is proportionate to the planned corporation tax hike in 2023.

Chancellor Rishi Sunak confirmed in his March Budget that the UK government would raise corporation tax to 25% in the 2023/24 financial year.

The UK government has also vowed to ensure that the planned developer tax hike does not disproportionately impact housing supply “or other government housing objectives”, such as unlocking investment, supporting local areas and increasing boosting market resilience.

The consultation also aims to seek how the new tax can work alongside the Gateway 2 developer levy, which will apply when developers apply for permission to develop future high-rise buildings in England.

And within the consultation, Downing Street has recognised that retirement schemes offer different levels of care. The Treasury said that profits generated from these schemes would fall outside the scope of the tax as the service provided in these builds are “an integral part of a communal dwelling.”

However, the consultation includes a condition stating that if the new tax for UK residential property developers does not generate sufficient revenue, ministers would consider extending it beyond the ten-year timeframe.

Secretary of State for Housing, Communities and Local Government, Robert Jenrick, stated: “We are prioritising safety standards for the next generation and ensuring the industry is held accountable for the wrongs of the past.

“The £5BN investment will not only improve high-rise buildings but help to protect leaseholders from the cost of replacing unsafe cladding on their homes.”

Currently, the consultation does not contain the tax rate; however, this will likely be announced during the next fiscal event, providing the design of the tax has been established.

However, two models have been proposed for recognising profits subjected to tax. The two alternative systems being considered are:

• Model 1 – tax would apply to all profits generated by a business – including commercial property development and other non-related activity – if the firm has displayed more than an “insignificant” amount of activity in residential property development (what denoted “insignificant” has not yet been established); or
• Model 2 – tax would only apply to profits generated from RDPT activities from companies that undertake any UK residential property development work.

The government also proposed that profits be “ring-fenced” by ensuring that the Residential Developer Property Tax is not reduced by any pre-April 2022 losses, group relief, or funding costs.

Furthermore, the new RDPT will not apply to companies with profits that fall short of GBP 25M a year, albeit this could change if the UK government finds that the new tax failed to achieve their ambitions after ten years.

So, if you’ve been considering getting involved in the property development market and are now considering what steps you need to take to prevent your property development dream from turning into a nightmare, read our inside guide to property development below.

How to get into property development and become a property developer

With the UK being a popular property investment destination, it has long been attractive for those looking to expand their wealth or make property development a primary business.

And while the COVID-19 pandemic and the Brexit vote have undoubtedly impacted Britain’s housing market, and in some sense, made property development less appealing than in previous decades, it continues to present some lucrative opportunities for investors.

According to recent research from global real estate agency Savills, UK property and rental prices should increase by a staggering 15% over the next five years, as concerns over Brexit dissipate.

The latest figures from the Office for National Statistics (ONS) have already revealed that average house prices in England have risen by 8.7% over the past year, driven by Chancellor Rishi Sunak’s stamp duty holiday.

However, start-ups and even more seasoned developers must be prepared to be patient and work hard before you can make it a permanent job.

While property development is rewarding, many developers must maintain full-time jobs while working on housing projects to ensure they have regular income coming into their bank accounts.

What is property development?

Property development, or real estate development, is developing buildings or land into a higher use-value.

It’s a multi-faceted business that encompasses:

• Acquiring land for a ground-up property development project;
• adding value to an existing property by renovating, extending and improving the build; or
• converting existing properties from one type to another, e.g. a house into two flats.

However, before rushing into a project, you must first ask yourself: What kind of developer do you want to be? Will I establish myself as a sole trader, business partnership or limited company? Do I have the financial capacity to get into property development?

Although popular TV shows make it look relatively simple – buy a run-down property and renovate it on weekends to sell for profit, there are a significant number of questions that need to be answered.

You will need to compare potential opportunities with exit strategies to cover yourself from all angles, carry out thorough market research, consider financial costs, whether you’re buying to sell or rent and any tax implications.

Create a property development business plan

Create a business plan of your short- and long-term goals, objectives, potential costs, income and expenses, as well as any other factors which may need to be considered to help you determine a strategy before you invest.

Before determining how you plan to move forward with your property development project, make sure you have a comprehensive understanding of the following:

• Who is your target market?
• What sort of properties will appeal to appeal to your target market?
• What are the construction and renovation costs?
• How are you going to finance the project?
• How long do you expect the project will take to complete?

You should also consider whether your goal is buy-to-let or buy-to-sell and factor this into your business model.

Buy-to-let vs buy-to-sell property: What are the pros and cons?

Buy-to-let is essentially a passive income strategy, as you purchase property and rent it out to tenants, hoping it generates enough net cash flow to pay off the mortgage.

While there tends to be some extra profit involved in buy-to-let, you will also need to consider additional maintenance costs, repairs to the property and tenancy management.

While renting out property offers an excellent long-term income stream, you may also need to plan for void periods which could eat into your income if you’re unable to find new tenants for a significant length of time.

Keeping abreast of renovation and construction costs will also be crucial, so if you opt for the buy-to-let route, we advise creating a detailed plan, with at least 10% leeway in case your project goes over budget.

You could ask a letting agency to take care of the tenancy work for you; however, you will need to factor in the cost of their service, which could cut into your profit.

Although buy-to-sell may not sound as attractive, given that UK housing prices are rising exponentially, you could still generate significant profit on your sale.

While you must ensure that the cost of acquiring the property and renovating or reconstructing the building does not eat into your profits when you sell the project, you won’t need to worry about property maintenance or tenancy regulations.

A successful buy-to-sell strategy often comprises purchasing a run-down property and upgrading or renovating the build to add significant value.

While properties in need of more work carry more immense risks, they also offer a considerable amount of profit. Nonetheless, it’s best to start with a project that doesn’t require a substantial amount of work if you’re just getting started.

If you’ve fostered a good relationship with builders, plasterers, architects, electricians and any other professionals you’ve worked with, create a black book for industry contacts that you can call on for your next project.

Where possible, experts advise doing work by yourself or with the help of relatives and friends who are happy to work for free to reduce your outgoings – that way; you’ll have more to spend on your next project.

Alternatively, you could keep the profit, but this is a quicker way to expand your property portfolio.