New government tax proposals aimed at large residential property developers could impact the overall delivery of new homes and amplify the housing deficit, according to market participants.
Last week, the government published a consultation for a new Residential Property Developer Tax (RPDT) which ministers are intending to set out in 2022.
“The build to rent (BTR) sector is at risk of being adversely affected by these rules and that will ultimately impact the overall delivery of new homes that are badly needed in the UK,” said Philip Slavin, chief financial officer at Quintain.
“In the short-term it is quite possible that this tax could cause developers to slow-down or postpone certain schemes until the uncertainty is resolved,” he said in an email. “For schemes due to complete next year this is just a cost that will have to be borne by certain developers, but in the longer term, there is a real risk that the tax could prevent certain schemes from being viable, reducing the number of new homes built in the UK.”
Alongside the RPDT, the government is looking at introducing a new Gateway 2 Levy which will apply when property developers seek permission to develop certain high-rise buildings in England.
“If a developer is looking at a site that is on the cusp of their minimum profit level, this tax could make a site no longer feasible, which means the housing deficit will continue to grow,” said James Mole, director at London Belgravia Specialist Finance.
The proposed design of the time-limited tax is set to raise at least £2bn over a decade to help contribute to the cost of cladding remediation work.
“Given the significant costs associated with the removal of unsafe cladding, it is right to seek a fair contribution from the largest developers in the residential property development sector to help fund it,” said Jesse Norman, financial secretary to the Treasury, in a statement.
According to Slavin, the damage could be severe.
“We are concerned that with this new tax regime Quintain may not be able to deliver all of the 8,500 homes we have permission to build at Wembley Park – a third of which will be affordable housing of all tenures.”
“We are also concerned about any tax on notional profits ie where profits or gains are not realised, and the potential impact on viability of Build to Rent (BTR) schemes in the future.”
The tax is aimed at residential developers with profits over £25m. This might allow smaller developers a chance to compete in the market, according to Mole.
“If we have to implement it, then it should certainly be limited to the more larger house builders. It is hard enough for SME developers to compete with the national house builders as it currently is.”
However, the bias could distort the development market, argues Slavin.
“It is possible that this de-minimis could in-fact cause a market distortion. We would prefer a simple regime that can provide greater certainty over development costs rather than a complex new tax regime that could cause delays and uncertainty.”