Residential property developer tax: a welcome exclusion

Maheshi Gourlay, EY Associate Partner, Tax, comments on the Government’s Budget response to its consultation on the Residential Property Developer Tax: 

“The exclusion of Build to Rent assets and certain communal housing – such as care homes and purpose-built student accommodation – from the scope of the Residential Property Developer Tax recognises the strong case made that the tax was too exhaustive in its original design. With these changes, the tax will fall much more on the policy areas that the Government originally intended, reducing what could have been some significant collateral impact. 

“The confirmation of the rate at 4%, and allowance at £25m, helped to end speculation of change. The industry will be hoping that this allowance will increase with inflation, rather than be affected by the same fiscal drag imposed elsewhere in the tax system. Meanwhile, it is also significant that interest deductibility will be restricted, especially given how highly leveraged the real estate sector is and because interest represents a genuine cost in a property developer’s business.

“Property development is a long-term business and so many in the industry may be concerned that, despite the Government’s assurances that the measures are time limited, the proposals are missing a formal sunset clause. The latter might provide more certainty for those covered by the tax, rather than relying on the Government’s goodwill.

“Given the intention is for the measures to come into force from April 2022, clear guidance from HMRC on how the tax will operate in practice will be essential.”