How Tax Schemes could Support Property Developers?

construction planning

Much is made in the press about greedy developers profiteering from first home buyers’ misery and how they are slowing down the delivery of much need housing to prop-up pricing. How much of this is true versus media hype?

I thought it would be interesting to set out the taxes developers pay in the UK and how tax schemes could support property developers in delivering more housing.

What taxes do property developers pay?

It may surprise people to understand what taxes developers pay; there are many more than people think. First, let’s start with the one everyone is aware of, Corporation Tax.

Corporation Tax

Corporation tax is levied on the profits made by property developers; the tax is currently a flat rate of 19%. In global terms, the UK has some of the lowest Corporation Tax rates around the world and on the face of it, Property Developers in the UK are far better off than similar European and G7 countries.

CountryCorporation Tax 2021
New Zealand28%

However, shortly the UK will go from its ‘low’ Corporation Tax status to having taxes far more in line with other countries.

In April 2023, corporation tax in the UK will increase to 25% for all companies with profits above £250,000. In reality, because most developers make profits significantly in excess of £250,000, effective April 2023 they will all be subject to a Corporation Tax rate of 25%.

The Hidden Taxes on Property Development

Ok no big deal, cry me a river! Poor old property developers. They had it good for a while and soon they will simply just be paying taxes in line with other countries around the world; what’s the big deal? The reality is in the UK, Property Developers pay a significant amount of stealth taxes that most people aren’t aware of.

tax payer

Stamp Duty Land Tax (SDLT)

Developers have to pay Stamp Duty Land Tax (SDLT) when they purchase land for development. Like everyone else, property developers pay SDLT when they buy land and the SDLT is payable to HMRC within 14 days of the purchase. However, property developers do not pay the same amount of SDLT as someone who purchases a residential property.

Property developers pay SDLT on increasing portions of the price of the land for non-residential or mixed-use land, such as land used for residential development.

Property ValueRate of SDLT
Upto £150,0000
Next £100,0002%
Remaining Amount5%

Section 106 Contributions

In addition to paying SDLT on land, when new residential developments obtain formal development consent in the UK, property developers are asked to contribute towards funding new infrastructure and social housing in the local community. These contributions amount to an additional tax on developers, and they are covered by what is called a Section 106 Agreement.

There are no specific rules to establish what financial contributions are in a Section 106 Agreement. The terms are negotiated directly between developers and local authorities during the planning process. However, they typically will require the developer to make cash contributions and commit to selling a proportion of their developments to social housing providers.

How much social housing a developer is required to provide changes depending on the location and demand. However, it is typically between 30% and 50% of the new development. This requirement is ultimately a form of stealth taxation, this is because there is a limited market of companies who can purchase social housing and a limited market for whom can occupy it. Developers are forced to sell the newly built homes at a discount to their retail price, the discount is not a fixed amount but is generally 20 – 40%! This means that developers have to sell this accommodation at best at cost or in many situations at a loss.

Community Infrastructure Levy

The Community Infrastructure Levy (CIL) is a charge that local authorities can set on new development in order to raise funds to help fund the infrastructure, facilities and services – such as schools or transport improvements – needed to support new homes and businesses.

Introduced by the Planning Act 2008, local authorities are allowed, but not required to introduce a CIL. CIL is different to S106 in that it is levied on a much wider range of developments and according to a published tariff schedule. This spreads the cost of funding infrastructure over more developers and provides certainty as to how much developers will have to pay.

A number of London boroughs are looking at implementing a CIL in the near future. Once a CIL is implemented, a borough will still be able to negotiate for an S106 agreement, but it will be restricted to site-specific measures and to the provision of affordable housing. 

New Residential Property Developer Tax

In response to the Grenfell Tower fire, in which many residents of Grenfell Tower lost their lives due to the presence of unsafe highly flammable cladding on the exterior of the building, the government introduced new tax schemes on developers with profits of more than £25 million p.a. of 4%.

The tax will be applied over a 10 year period and is designed to raise around £2 billion over its lifetime. The money will be used to remediate buildings with unsafe cladding.

Prescriptive Housing Mix

Another of cost or form of taxation in the UK which is imposed by stealth is prescriptive housing mixes required by local authorities. In the UK, developers are not allowed to simply build the type of housing they would like to. For example, a developer could not simply build a new building with just 50 two bedrooms apartments and nothing else. Local authorities set out specifically what mix of accommodation a developer must build in a new housing development.

In principle this probably makes sense to many people, however, this comes at a cost for developers. This is because there is a diminishing return which developers can sell each square foot of new space for as apartments get bigger. For example, on an equated £ per ft² basis studio apartments sell for a much greater amount than say a four-bedroom apartment. In addition, typically it is much more difficult to sell larger apartments and developers are generally not able to sell them until much later in the development process. This means they cannot get their money until much later in the sales and marketing process.

What is the impact of these Taxes?

The problem with these taxes is that they do nothing to help facilitate the construction of much needed new housing. In fact, these taxes do the opposite, they have two direct implications.

  1. They slow-down the delivery of new housing – higher tax costs for developers mean that they deliver housing more slowly because higher costs mean that they must be more diligent when they buy land for development and sell property much more slowly so they can maximise profits.
  2. Increase the price of open market product – as we have seen with both the Help to Buy scheme and the SDLT holiday they simply increase prices rather than stimulate the delivery of new housing.
property developer PropTech Pioneer How Tax Schemes could Support Property Developers?

What tax schemes could Support Property Developers?

So now that you know what taxes developers pay, what taxes would support property developers? Well, it depends on what you are trying to achieve. The issue with many taxes aimed at both developers and the property market is whilst many are well-intentioned, they simply miss the mark. Measures such as Help to Buy have increased pricing below £600,000 and created huge competition between investors and first home buyers. And the Stamp Duty Holiday pushed house prices in the UK to grow at their fastest rate in many years.

In my view taxes and or tax breaks should look to achieve the following objectives:

  • More developers – tax breaks should help smaller developers to grow and even better create new developers. In 2019, 368 house builders went into insolvency.
  • More property – the UK has never met its new housing targets, and taxes or tax breaks should make it easier to deliver more new housing
  • Moderate significant price fluctuations – taxes such as the HtB scheme and the SDLT holiday have created significant short-term increases in pricing. In the longer-term slow and steady growth is generally preferred.

Create Specific SDLT Tax Breaks

Stamp Duty is currently being used as a relatively blunt instrument, many SDLT tax breaks have created unintended consequences and either accelerated price growth or created competition at specific areas of the market.  Why not create targeted Stamp Duty Tax breaks which encourage positive market movement, this could include things such as the following:

  • Down-sizing – the freeing up of new family housing is a major issue in the UK. Many older couples want to move but don’t want to pay stamp duty when they move – it is simply cheaper to stay put. What about if families who sold their principal residence paid no stamp duty when the purchase a new residence which is 20% or more smaller than their current home?
  • Geographically Targeted SDLT – in order to encourage developers to build new homes in the areas of greatest need they could provide limited SDLT holidays on new build properties sold in specific locations.

Create Specific Rules for Planning

One of the largest expenses for developers is the cost of obtaining planning consent to develop a new property. The issue with making a planning application is that before a developer goes through the process of obtaining consent they have no idea what the specific cost of Section 106 contributions will be. In addition, significant costs are incurred in paying for planning consultants, surveyors and lawyers in order to obtain consent – these are all costs that are passed on to the end consumer.

If there were specific non-negotiable rules which set out the cost of section 106 contributions (obviously from the developer’s perspective the lower the better) this would effectively self-regulate the market. This is because one or all of the following would ultimately occur, landowners would have to reduce their prices, developers would have to lower profit aspirations, house prices would need to go up.

Off-Site Contributions for Section 106

Another significant expense related to Section 106 contributions, is the cost of social housing (to a developer) because there is a specific requirement for developers to provide social housing on the site of their development. Whilst from a social perspective it makes sense for governments to mix social and private housing tenures. From a financial perspective, it is probably not the best use, particularly in locations where housing costs are high.

If say for example developers were not required to provide social housing on the site they were developing, but required to provide housing in the same city but elsewhere, it would have a few advantages, because this would undoubtedly take place in lower-cost areas, the developer could build a greater quantum of housing for the same cost and they could make a greater profit on their development, because a development which has 100% private housing will have a greater value.

Allow Developers to Build the most saleable product

Under current planning rules, developers are prescribed by local authorities what the housing mix should be. This has several issues; first developers cannot maximise the potential return from a site and secondly often that housing mix is not necessarily required by the market. Surely a developer would be best placed to build to determine what the housing mix should be, after all, they are the ones with the most to lose if the development goes wrong.

Offshore Sales

Finally, in many other countries, developers are restricted in the volume and type of housing they can sell offshore. There is certainly an argument to introduce similar rules for the UK, whilst it makes no sense to ban international sales completely.

Either limiting the volume of what can be sold or what type of developers could sell would create an environment where developers would be rewarded to develop a specific type of housing.

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