Investors building properties for rental may now pull out, say tax and advisory firm Blick Rothenberg.
Heather Powell, a partner at the firm and Head of Property said: “Governments plans to raise £2bn from residential developers to pay for the cladding crisis via a tax on their profits and will cause many investors to think again.
“Funds will be raised in two ways, a tax on their profits, to be called Residential Property Development Tax (RPDT) and a levy charged to all developers building new high rise residential blocks.
“The RPDT is to be payable on profits generated from residential development in excess of £25m, but no deduction will be allowed for any interest and finance charges when calculating the profit to be taxed. As interest is a major cost for many developers the tax could push a profitable development into a loss.”
Heather said: “The real shock is that the government proposes to tax the “development profit” of investors building properties for rental. It is proposed an investor should pay the RPDT on the ‘assumed profit’ of these developments. The unearned profit that the government propose to tax is to be calculated by taking the market value of the new homes built less the cost to build them, excluding interest. The rent collected in the first year will not cover the tax liability, so the tax becomes an additional cost of the development – and many investment appraisals for these schemes will now fail.
“The Government has a target of delivering 300,000 new homes a year which has never been met. Investors in “built to rent” have a contribution in the delivery of new homes. This proposal is going to reduce the number of Build to Rent schemes delivered, making it even harder to meet this target.”