RPDT10200 - Key concepts: meaning of residential property development activities - Section 35 Finance Act 2022

Residential property development is a wide-ranging activity that encompasses a number of different activities that are illustrated by the list in FA22/S35(2)(a) to (g). Many of these activities will be carried out in-house by a property development group, but aspects of design, construction or marketing etc. may well be outsourced to third party contractors. The RPDT is not intended to encompass the trade profits of third-party contractors who are working for an unrelated developer or landowner.

The distinction between a contractor and a developer is critical for RPDT. Only the activities of a developer will be RPD activities. This distinction lies in the developer (or a related company) holding or having previously held an interest in the land under development. In the simplest cases, the trade of a residential property developer consists of buying land, obtaining planning permission, building houses or flats on the land, and selling them to realise a profit. Inevitably, many developers’ business models are more complex than this, particularly in larger developments that may involve joint ventures with landowners who may include public bodies, construction groups, investment partners and others.

Within a group of companies that carry on a residential property development trade, there may be companies that carry on ancillary support trades supplying services or products to residential property developers both within the group and perhaps also to third parties. The question may arise to what extent the profits from such ancillary activities fall to be treated as RPD activities within FA22/S35(2)(g). If the products or services are supplied wholly to the other group companies that are RP Developers this will indicate that the activities fall within that section, so any profits would form part of the supplier’s RPD profits.

An example of this might be a company that manufactures timber frameworks for buildings that are primarily to be assembled on site by or for one or more related RP Developer. In such instances this activity would fall within FA/S35(2)(g) where it supports the RP Development activity of group companies, for example by taking some construction work off-site. An apportionment of the company’s CT profits to exclude profits from trading with third parties should be applied, where necessary, when calculating RPD profits (see RPDT20210).

Where, however the product being manufactured is a standard construction material that is also marketed and supplied as part of a trade carried on to a significant extent with third party construction companies, developers, and builders, then it is likely the profits of such activity derived from supplying a related RP Developer will fall outside FA22/S35(2)(g). The main requirement in this latter circumstance is that the products or services are supplied at an arm’s length price to related RP Developers, in accordance with FA22/SCH9/PARA3 (see RPDT20220).

A property developer may hold properties as stock that are temporarily let before their ultimate sale and the rents received will form part of a property rental business, see PIM4300. This income is not chargeable to RPDT. Similarly, where a developer retains the freehold and receives ground rents, that will be property business income.

Whether the profit on a later sale of a retained freehold would be chargeable to RPDT will be fact dependent. The freehold may be treated as trading stock because there is an intention to sell to it to a ground rent investor in due course, so there would be a trading profit chargeable to RPDT. Where the intention is to retain the freehold in the long term, perhaps while providing various services to the development, then the profit on a later sale is likely to be a chargeable gain and therefore outside the charge.

One occasional issue that is addressed by FA22/S35(3) involves arrangements where a developer sells its interest in the land being developed to a purchaser before the development is complete, and either the original developer or a construction company in the same group, completes the development under contract for the purchaser. This will happen as a way of funding the development, known as ‘forward funding’, whereby the developer receives the value of the land and the partially completed development, but is obliged to deliver the completed development in due course for a further payment (or payments).

In such cases the developer’s previous interest in land is sufficient to bring all the profits from those future payments within scope of the RPDT where FA22/S35(3) applies. This effectively requires that the future payments are linked to the original development of the land rather than to activities unconnected with the original development. An example to illustrate where a previous interest in land does and does not cause future profits to come within scope of RPDT is given below.

Example

Gilmour Developments Ltd (GD) acquires land and obtains permission for the construction of 150 residential units intended for rental to mainly younger people and families.

The mixture of houses and apartments are designed by a specialist architectural practice, Barratt-White and Partners (B-W).

The rental properties will be managed by an unconnected group headed by Calmer Waters Homes plc (CW), with whom GD enter into a forward funding agreement.

When the groundworks are complete, GD sells the land to CW for approximately 60% of the final value, with the balance to be paid in stages up to completion of the residential units. CW intend to let the units on short-term leases.

The remaining construction work on the units, including the provision of driveways and landscaping is undertaken by two members of the GD group, Wright Construction Ltd (WC) and Mason Building Services Ltd (MB).

After completion of the residential units and other works on site, CW puts out a tender for maintenance of the properties and grounds. A five-year contract is awarded to Klose Property Maintenance Ltd, (KPM) part of the GD group.

Who is undertaking RPD activities?

GD, WC and MB

GD has acquired the interest in land, and in seeking planning permission and commencing construction of the residential units will have profits from a trade that includes residential property development. These activities are clearly RPD activities.

WC and MB are undertaking activities of the kind mentioned in FA22/S35(2) – construction of the houses and flats is for the purposes of residential property development, and the construction of driveways and landscaping is done in connection with the development of residential property. Although neither WC nor MB hold an interest in the land at any point, we take into account the previous interest in the land held by the related company GD because subsection (3) of FA22/S35 applies – the activities are within FA22/S35(2)(d); the activities were expected to be undertaken at the time GD ceased to hold its interest in the land, and the activities are not undertaken solely in connection with areas of the development that are not residential property.

Who is not undertaking RPD activities?

CW, KPM and B-W

CW holds an interest in the land being developed, but its management activity is not carried out for the purposes of, or in connection with, the development of residential property, and it is not a member of the same group as those that are undertaking the development.

KPM – May well be undertaking activities of the kind mentioned in FA22/S35(2), managing residential property that has been developed by members of the same group, one of whom, GD, had an interest in the land. However, GD has ceased to hold its interest in the land at the time that KPM undertakes its activities, and those activities do not fall within the specific areas of design, planning and construction that allows subsection (3) of FA22/S35 to apply. So the previous interest in land held by GD is not to be taken into account. In this instance it is also likely that because KPM’s maintenance activities are undertaken in connection with CW’s trade of managing the development, rather than GD’s trade as a residential property developer, they will not be carrying out residential development activities.

B-W - This may well be a partnership of individuals, who are not within the charge to CT, so the profits of the architects’ practice would be outside the scope of the RPDT, which applies only to companies. If the partnership consisted of, or included, corporate members then it would appear that they are not part of the GD group, so the partnership is engaged as a third-party contractor. Consequently, neither they nor a related company holds an interest in the land being developed. Their design activities do not constitute RPD activities.

RPDT01100 contains a general introduction to RPDT and a list of abbreviations used.