The proposed residential property developer tax and the retirement living sector

The key details of the proposed RPDT are as follows:

• Along with the Gateway 2 Levy, the RPDT is intended to ensure that the residential property development community contributes towards the cost of replacing unsafe cladding on high-rise residential buildings.
• The RPDT will operate for 10 years, and is expected to raise at least £2 billion during this time. However, the Government has warned that the lifetime of the tax could be extended if insufficient revenue is generated in the initial period.
• The RPDT will be levied on companies and corporate groups which carry on residential property development activities in the UK and generate relevant profits of more than £25 million per annum.
• The concept of "residential property" will include any undeveloped land or land undergoing a change in use for which planning permission to construct residential property has been obtained.
• The RPDT will be charged in addition to corporation tax. The rate for the RPDT is expected to be announced in the Autumn budget.
• The Government published a consultation on 29 April, asking for views on the policy design for the RPDT.
• There will be a separate consultation on the Gateway 2 Levy.

The consultation indicates that, while not intended to allocate responsibility for the cladding issue, the RPDT is intended to apply to residential property developers that are operating in a market that will benefit from the substantial amount of funding the Government is providing to address building safety defects because of the impact that it will have on market confidence and liquidity. 

However, the Government recognises that although the tax will apply to housebuilders and developers of purpose-built student and retirement accommodation, some sorts of communal dwellings have different characteristics from mainstream housing, and therefore will not necessarily benefit in the same way from the Government's interventions. 

It therefore intends to exclude some sorts of communal developments from the RPDT, including those forms of retirement accommodation which provide certain services as an integral part of the dwelling, such as varying levels of care, catering and cleaning, as are offered in a traditional residential care home.  However, retirement living schemes in which accommodation is self-contained and care provision is not a key offering will be subject to the RPDT even if there are communal facilities.

A very similar argument has been used to secure an exemption of C2 retirement accommodation from the Community Infrastructure Levy: that the cost of construction of such units and the fact that living and medical support facilities are an integral part of the offering renders them sufficiently different from standard C3 residential accommodation to justify their exemption from that levy.  However, one of the main points raised by developers in this sector is that many of the new-build schemes that supply accommodation for older people are often much more complex than the duality between care homes on the one hand and retirement flats on the other as envisaged in the consultation.  In reality, many modern developments in this sector offer a blend, for instance residents in most retirement villages can live independently where possible and when necessary can choose from a menu of services including catering, laundry, cleaning and personal care.  As described in more detail elsewhere, these sorts of schemes offering flexible provision of care often fall between two stools for planning purposes; for example, in some settings residents require little care when they first move into the accommodation (undoubtedly a C3 use) but, as their care needs increase, that care is provided within the wider development without the individuals having to move (a class C2 use).  Developers will undoubtedly make the case that this uncertainty is unhelpful for the sector and that all seniors housing with care should fall within the RPDT exemption. 

Another point raised by some developers is that senior living schemes rarely incorporate cladding so residents in these developments have not, in the main, been affected by this issue.  It therefore seems unfair for these developers to be asked to contribute to the cost of resolving problems that have occurred in the mainstream residential development sector.  The consultation expressly states that the introduction of these measures does not imply responsibility on behalf of the payers for historic construction defects in relation to cladding, and that the Government recognises that many developers have had limited involvement in the development of high-rise buildings that require remediation and/or have already taken steps to cover the costs of remediation where applicable.  It goes on to say that the reason the Government believes it is fair for all developers to be taxed is that they will all benefit from the Government's measures to protect the housing market such as its increased funding for cladding remediation, the 2021 SDLT holiday and the mortgage guarantee scheme.  However, some retirement developers consider that the situation is more complicated than this, in that:

• mainstream residential developers have profited historically from the taxpayer-funded Help to Buy programmes, which helped maintain price increases in this sector. By contrast, retirement housing developers were not eligible for this scheme, which increased the feeling among some that it has been hard for this sector to compete on equal terms with mainstream housebuilders. 
• If the argument for the tax is that it is a way to share the anticipated increased market confidence and liquidity attributable to Government funding for the resolution of building safety defects, then there should be recognition that not all sectors of the residential development industry will benefit equally from this funding.
• All forms of retirement housing operate in a market which is parallel to the mainstream housing market, not part of it.

More generally, there is a widespread view in the real estate industry that if a residential developer failed to meet the building regulation standards in place at the time of construction them that developer and/or its insurer should fund the replacement of inadequate cladding.  However, if it is decided that the building regulations were deficient at the time of build in not prescribing what constituted safe cladding then the Government and its health and safety agencies are responsible for the crisis.

There is also general concern that the new regime might result in a reduction in the supply of retirement accommodation.  This would be contrary to the public interest in ensuring an increased provision of housing suitable for the growing elderly population, both in terms of meeting their health and social needs and also releasing family homes through the downsizing process.

As part of the overall picture of improving the diversity of provision within the senior housing sector, there is an increasing volume of BTR units.  The RPDT consultation paper suggests that the tax should apply not only to developers who build to sell, but also to those who build to rent.  According to the paper, it will be possible to capture the open market value of a BTR scheme when it reaches practical completion and the RPDT can be calculated on the basis of this figure, ie fair value of the development upon initial rental, minus the costs of development. 

This raises several concerns regarding the correct methodology for any such valuation but also, and more importantly, this would be a ‘dry’ tax charge as, unlike build-to-sell, without a sale there would be no external cash with which to pay the tax.  Some commentators have suggested that, if these properties are to be taxed, a better approach may be to tax a proportion of the rental income.

The Government considers that any profits made in relation to the development of affordable housing, social housing or shared ownership schemes should be in scope of the tax where not, for example, held by an exempt charity. It recognises that there is usually no profit from these forms of housing when they are built to comply with section 106 agreements entered into in order to secure the grant of planning consent for a residential development. However, there are some situations where there may be some profits from such housing, for instance where housing associations sell a proportion of homes in a scheme on the open-market in order to subsidise the affordable housing element.  The consultation does not clarify how properties built for affordable rent should be treated.  However, the paper does indicate that the Government it is open to representations about how such arrangements work in practice and whether they should be included within the scope of the RPDT. 

The Government has asked to hear about alternatives to the approach to RPDT that they have outlined for retirement housing.  If you would like to feed into our response, please let us know your thoughts before the consultation closes on 22 July.