Session 2021-22
Finance (No.2) Bill
WRITTEN EVIDENCE SUBMITTED BY THE BRITISH PROPERTY FEDERATION (BPF) (FB09)
Submission to the Public Bill Committee on Finance (No 2.) Bill 2021/22
Introduction
1. The BPF is the trade association for the large-scale property investment sector, and therefore represents organisations such as pension fund managers, who allocate pensioners’ savings into property.
2. This submission focuses solely on the Residential Property Development Tax (RPDT).
3. Several meetings have been held between HM Treasury officials and our sector over the past few months on the RPDT, which we are grateful for. This reflects that the application of RPDT can be very complex, particularly in defining what sort of development profits should be captured. So far as the development of rental accommodation is concerned (Affordable Housing, Build-to-Rent, and Purpose-Built Student Accommodation) profits are only realised over a significant timeframe as the property is rented out and determining what ‘book-profit’ there might be from the development process would be extremely complex and based on various assumptions, some of which would be quite arbitrary. On rental property, the ownership is also very clear, and rental property owners have no call on Government remediation funding, which is aimed at assisting the leasehold sector.
4. Ministers therefore made the decision that Affordable Housing, Build-to-Rent, and Purpose-Built Student Accommodation should be out of scope of RPDT, which we think is correct.
5. However, two exceptions to this remain:
· Build-to-Rent development through a forward funding arrangement.
· For-profit provision of Affordable Housing.
6. Applying RPDT to Build-to-Rent in some instances, but not others, creates a very unlevel playing field between different business models.
7. Applying RPDT to for-profit provision of affordable housing seems counter-intuitive to the funding pressures on housing associations and efforts of other parts of Government to attract long-term private capital to help fund the provision of affordable housing.
8. The rest of our submission explains this in more detail.
What is the issue on Build-to Rent?
9. We very much welcome the decision to exclude profits from Build-to Rent (BtR) properties from RPDT where it is developed as an investment. The Government has said that no additional legislation is needed to provide for this as BtR property would not be held as trading stock and the developer of the property will not have trading profits (and so the charge to RPDT would not arise in any event).
10. We agree that where BtR property is both owned and developed by the same company, then (under the current legislation), RPDT should not be payable. However, this is only one model for BtR activity – and we are concerned that an exemption that only applies to one particular model of BtR investment will create an unlevel playing field and stifle investment in a segment of the market which, while still relatively nascent, is growing fast and plays an important role in delivering the Government’s policy objectives in relation to housing. Specifically, greater planning policy emphasis is now on delivering housing supply in 20 key cities, which also account for 80% of BtR delivery.
11. Within the BtR market, some groups establish a separate development company to acquire the land and carry out the development, with the completed BtR property being sold to a group investment company to hold (and manage): the intention of the group is to "develop and hold" but that intention is realised by a two-stage process. In such a situation, there will be a company that has an interest in land within section 4 that is trading stock and that will realise trading profits on the intra-group disposal and so, in the absence of additional legislation, RPDT would appear to apply.
12. Also, within the market, a significant number of BtR developments involve a company that develops BtR properties to sell to a third-party investor: the model here will generally involve a forward funding (as a result of which the transaction effectively represents an agreement to deliver a completed BtR building to a known (and pre-committed) specific investor). We understand that such transactions represent a substantial majority of current BtR schemes, over 80% of European investors are looking to commit funds into creating new housing supply this way. Again, in the absence of additional legislation, RPDT would apply.
13. A further distortion is created by the position of in-house construction, which is currently in-scope of the tax, while third party construction is not. Under a forward funding model, where ownership of the land is passed to the investor, group companies that have an in-house construction capability will be charged RPDT on construction profit if they provide the construction, disadvantaging them.
Possible solutions
14. We therefore ask that the Bill Committee explores other approaches to excluding BtR from RPDT. In particular, an exemption for BtR properties (by way of adding "BtR property" to the list of buildings not treated as "dwellings" as set out in section 5(2)) should ensure that the development of a BtR property is outside the tax regardless of the way the development is structured (i.e. mirroring the approach taken for student accommodation where it is the end-product of development activity that determines if RPDT is payable, not the development model used to build it).
15. We appreciate that identifying and drafting a definition of BtR property will require careful consideration to ensure it is appropriately targeted – but we consider that this is the optimum way to ensure that BtR development activity is outside the scope of RPDT, which is the only way to prevent a distortion between models.
16. If helpful, we would point out there are existing definitions of BtR, for example, in the glossary to the Government’s National Planning Policy Framework:
· Build to Rent: Purpose built housing that is typically 100% rented out. It can form part of a wider multi-tenure development comprising either flats or houses, but should be on the same site and/or contiguous with the main development. Schemes will usually offer longer tenancy agreements of three years or more, and will typically be professionally managed stock in single ownership and management control.
NPPF 2021 edition, page 65.
17. Given that planning conditions relating to BtR development will generally be aimed at preventing changes to other uses without re-opening discussions on the overall development, there should be limited risk in terms of units in a developed BtR property being then sold on as "dwellings".
18. There are other drafting options which may be effective in excluding group "develop to hold" BtR activity from RPDT (i.e. where one group company develops and sells to another group company to hold as an investment), but this would still result in some market distortion given that there would be additional (RPDT) costs where an investor contracts with a third party to deliver a completed building. Consideration would also need to be given to the role of joint ventures in this sector (i.e. where there is a "relationship" between developer and ultimate owner, but one that falls short of "tax grouping").
What is the issue on Affordable Housing?
19. As rehearsed, the development of market rented homes – so called Build-to-Rent – is mainly out of scope of RPDT. So is the development of affordable housing developed by not-for-profit registered providers. In the case of Build-to-Rent, it is difficult to isolate what is a development profit from the profits resulting from the long-term ownership of the finished homes. In the case of affordable housing, it is generally felt that affordable housing meets other important social objectives and should not be taxed.
20. There is an anomaly that investment for-profit in affordable homes is within scope. Pension funds are increasingly investing in the provision of affordable housing, both social rent and shared ownership. You can see some examples at: https://www.legalandgeneral.com/affordable-homes/
21. As a result of this anomaly, pension funds investing in affordable housing will have to pay RPDT.
What are the consequences?
22. Ultimately, less investment and fewer affordable homes for rent and shared ownership, and thus depriving those who are trying to get onto the housing ladder of some opportunities.
23. Pension fund investment at scale in affordable homes is in its infancy and the application of RPDT will dent investor confidence, at a time when other parts of Government are trying hard to encourage such investment into the sector. For example, Homes England now allows the private sector to bid for strategic partnership status on affordable housing delivery: https://www.gov.uk/government/news/homes-englands-strategic-partnerships-for-the-affordable-homes-programme-2021-26
The Government’s position:
24. HM Treasury in its response to the consultation on RPDT, published at the Budget, explains why for-profit affordable housing is included….
"The government recognises that some would have preferred a broader approach which would exempt all registered providers of affordable housing. However, it believes that such an exemption is not justified on the grounds that the development of affordable housing with a view to making a profit from that activity, is clearly the development of residential property."
25. This position, leads to some odd practical outcomes…
a) Pension funds investing in the provision of rental homes will pay RPDT on their affordable development, but not on their market rent development, or on for-profit development of student accommodation, which is also out of scope.
b) The for-profit sector is small and nascent. RPDT on its activities will barely make any contribution to the £2bn the Government is seeking to raise from RPDT over 10 years, but could have a significant impact on pension fund activity in the sector and confidence in investing in something which is new to institutions.
Conclusions
26. We would urge the Government to focus on outcomes and urge discussion at Committee Stage to explore:
a) Why is the Government taxing the development of affordable housing?
b) Shouldn’t investment in affordable housing be treated the same as investment in market-rented housing, or student accommodation, and be out of scope?
c) What will be the negative impact on the supply of much needed affordable homes for rent and shared ownership homes for people trying to get a first foot on the housing ladder?
d) Is there an inconsistency in encouraging such for-profit investment, for example through funding programmes, and then discouraging it through the tax system?
The BPF has an Affordable Housing Committee that are concerned about the outcomes we have detailed and have issued the following statement:
"There are unprecedented pressures on the affordable housing sector to fund the delivery of more new homes, yet the capacity of the traditional affordable housing sector is constrained and unable to meet need.
The exemption of most forms of affordable housing providers from the Residential Property Developer Tax (RPDT) is welcome, but it is unfathomable why Government would want to tax the development of any affordable homes? The inclusion of for-profit providers of social housing in the RPDT will make little contribution to the Government’s revenue-raising target of £2bn, yet impact on this essential and rapidly growing source of investment in the affordable housing sector. It will be a bad outcome if in supporting remediation Government deprives the affordable housing sector of any investment.
As a group of major for-profit and not-for-profit providers we urge that the RPDT exemption must extend to all forms of affordable housing, including that delivered by privately funded for profit registered providers of social housing. Taxing these types of providers will deter new investment in much needed affordable housing and runs counter to the work in wider Government which is encouraging more private sector investment in affordable homes. It also leaves a position where a pension fund investing in the development of market rented homes is not taxed, but their investment in the development of affordable housing is taxed, so putting at risk investment in housing for those who most need it.
We ask the Government to reconsider."
British Property Federation
CBRE Investment Management
CBRE Limited
Dolphin Square Foundation
Federated Hermes
Gowling WLG (UK) LLP
Grainger plc
Hyde Housing Association
JLL
LaSalle Investment Management
Legal & General
M&G Real Estate
Optivo
PGIM Financial Ltd
Pinnacle Group
Quintain Limited
Savills plc
Trowers and Hamlins
Watkin Jones plc
More information:
Please contact Ian Fletcher, Director of Policy (Real Estate) British Property Federation, email: ifletcher@bpf.org.uk; tel: 020 7802 0112
December 2021