Cladding claim – developers could face tax on profits as high as £50m

28 May 2021 | Investment

Cladding claim - developers could face tax on profits as high as £50m

The UK’s 10 biggest developers could each face a potential average tax bill of £25 million per year if the government introduces a new residential property developer tax, according to research by a lettings and estate agent.

In the wake of the Grenfell Tower tragedy in 2017, it was uncovered that high-rise residential properties across the country are covered in potentially dangerous external cladding – all of which must be replaced.

The new tax proposal has been conceived to ensure that developers contribute to the significant cost of completing this work.

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Developers will be taxed on profits exceeding £25 million in order to contribute to a £5 billion relief fund and the research by Benham and Reeves shows that this will lead to the UK’s 10 biggest developers facing a potential tax bill of £25 million.

With developer profits for 2020 providing an unreliable measure due to the impact of the pandemic, Benham and Reeves analysed developer profits from 2019 to see just how this new tax introduction could affect developer returns in more normal market circumstances.

How much could developers be taxed?

With the exact tax figure yet to be announced, Benham and Reeves based their research on a conservative, but not unlikely, 5% annual tax on profits over £25 million.

Based on this 5% rate and the average profits of the 10 biggest housebuilders, the agency estimates that they could see an annual tax bill to the tune of £25,104,500.

This could be far higher for the very biggest housebuilders. Persimmon saw a pre-tax profit of over £1 billion in 2019, meaning that a 5% tax above the £25 million threshold could run as high as £50.1 million a year.

Barratt and Taylor Wimpey could also be in for some of the heftiest tax bills at £44 million and £40.5 million respectively. Smaller housebuilders such as Crest Nicholson and Miller could also see profits taxed to the tune of £4.8 million a year.

Marc von Grundherr, director of Benham and Reeves, comments: “The UK is in the middle of a housing crisis and the government has very publicly stated that they are relying on the tenacious work of housebuilders and developers to introduce the hundreds-of-thousands of new homes that are so desperately needed.”

“Rather than light a fire under developers to get out and get building, the government could now slap them with a brand new tax bill that will surely make them pause and consider whether scaling up their ambitions is even worth their while.”

He adds: “Housebuilder profits aside, it will be the British public who suffer most with less homes making it to market causing demand to further outstrip supply, thus pushing already inflated house prices even higher.”

This post has originally been featured in Property Investor Today.