RPDT10340 - Key concepts: Interest in land: effect of developer group retaining a freehold interest after the grant of long leases

RPDT10330 explains that certain forms of income can arise to a company that retains an interest in a development following the sale of the developed properties, typically because the company, or a company in the same group, retains a freehold interest following the granting of long leaseholds. Such income will generally not be within the scope of RPDT, as shown in the following example -

The Lyric Retirement Properties plc group are a specialist developer of retirement housing. Their business model involves Hunter Developments Ltd (HD) acquiring freehold land, group company Hunter Construction Ltd (HC) is paid a fixed fee to construct houses and flats and then HD sells long leasehold interests to individual purchasers. The development is marketed by another group company Jordan Sales Ltd (JS) exclusively to people over the age of 60. HD disposes of the freehold interest to another subsidiary, Harvey Homes Ltd (HH) for a nominal sum when the houses and flats in the development are almost all sold. HH manages the development going forwards. HH contracts with other group companies for the provision of services to occupants of the completed development. These services include:

  • Coleman Services Ltd (CS) providing on site wardens and security staff,
  • Harvey Maintenance Ltd (HM) maintaining the common areas of the development including car parking and gardens
  • assistance in reselling properties as they become available, including refurbishing the homes by HM and JS remarketing the properties.

Residents can opt to pay for additional services provided by a regular service charge or defer some or all of this and pay a one-off ‘event fee’ when the property is resold.

Analysis

The profits of HD from the sale of long leases are within scope of the charge to RPDT because it holds an interest in land (the freehold) as part of its trade of property development, and it disposes of interests in land (leases) in the ordinary course of that trade. The sale of the freehold is also potentially within the scope of the tax. The value of the freehold is nominal in this example but where that is not the case then the question arises of whether any profit is attributable to RPD activity or the role of the freehold as an investment asset, see RPDT20210.

The trading profits of HC from construction of the homes are within scope of the charge to RPDT because they are carrying out RPD activities in connection with the development of residential property on land in which a related company holds an interest.

None of the profits of the trades carried on by HH, CS or HM are within the charge to RPDT despite the fact that at least some of the activities are included in the list of RPD activities in FA22/S35(2) and they or a related company holds an interest in the land.

For HH this is because it holds the interest in land in connection with its business of operating the retirement village. That interest is not disposed of in the ordinary course of its trade, so will not be held as trading stock within the definition at FA22/ s36(6). For CS and HM, any profits from their activities, to the extent these may fall within the categories of RPD activities, arise in connection with the operating of the completed development, rather than in connection with a residential property development trade.

For JS, the profits from estate agency fees earned from reselling will not be within RPDT, for the same reasons as for CS or HM, but the marketing fees earned from the initial marketing of the development will be within the charge to RPDT as they are earned from activities carried out in connection with the residential property development trade of HD. In this instance, the CT profits of JS should be apportioned on a just and reasonable basis to exclude profits attributable to non-RPD activities.

RPDT20210 contains a further example based on a retirement living developer.

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