RPDT10400 - Key concepts: meaning of residential property - section 37 Finance Act 2022

RPDT is charged on the profits arising from a company’s trade to the extent that they are attributable to the development of residential property. For this purpose, the definition of what constitutes residential property follows some familiar principles that are to be found in chargeable gains and SDLT codes. FA22/S37(1) contains a broad definition of what falls within the definition, followed at FA22/S37(2) and (3) by some particular exceptions.

The general definition encompasses buildings or parts of buildings that are to form a dwelling, together with the garden or grounds, as well as land intended for such use. Unlike the chargeable gains rules in particular, the test is the intended use of the building, not the use to which a building has been put, because by its nature the RPDT applies to profits arising in respect of buildings or land under construction or development.

In particular, residential property includes land on which construction activities have not yet commenced, but that is intended for such development. The intention to develop residential property will generally be evidenced by an application for planning permission, or the marketing of the land with such permission by a company with an interest in the land that it holds as trading stock. This is illustrated by the following example.

Example

Brown and Son Ltd (B&S) is a family-owned farming company that has farmed land for many years. It owns the freehold of the farming land. The local council’s development plan identifies three plots of B&S land as suitable for residential and/or light industrial use. Outline planning permission is obtained for both uses in relation to all three plots. In order to guarantee the price that they might get for the land, B&S approach Greenside Land Promotion Ltd (GLP) to handle the marketing and sale. B&S grants GLP options to acquire the freehold in the parcels of land for £3m in return for a premium of £100k. After a successful marketing exercise GLP identifies a housebuilding group that is interested in two of the land parcels, and a commercial developer who intends to construct industrial units for rent on the third. GLP exercises the options over all three parcels and shortly after completes the sales to the housebuilder for £4m and the commercial developer for £750k.

Analysis

The £3.1m that Brown & Son Ltd receive for its land is in respect of land that is intended for use as residential property, and planning permission has been obtained for that use in respect of all three parcels of land. However, B&S holds their interest in land as a fixed asset of their farming trade, so it is not held as trading stock. Obtaining planning permission in these circumstances enhances the value of the fixed asset and so is not treated as a residential development activity. B&S will not be chargeable to RPDT even if their profits from land sales had been high enough to exceed the annual allowance.

GLP acquires interests in land that is residential property for the purpose of its trade that includes dealing in residential property. This, along with the marketing activities, are residential property development activities within FA22/S35(2). GLP disposes of those interests in the ordinary course of the trade. The profits of the two parcels sold to the housebuilder group will bring GLP within the scope of RPDT, subject to the RPD profits of the company exceeding its annual allowance. However, the sale of the parcel of land for light industrial development is not taken into account for RPDT purposes as there is no longer an intention that the land will be developed as dwellings, and at that point it ceases to be residential property.

By contrast to the above example, a land promotion company could act for a landowner and be paid a fee for their marketing and promotional activities without it or any related company taking an interest in the land that will be developed. In such a case, the profits of the land promoter from activities relating to the development of residential property where it is a third-party service supplier will not be taken into account for RPDT purposes.

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