The tax will help to pay for the removal of unsafe cladding on high-rise residential buildings alongside a new Gateway 2 developer levy, which will be applied when developers seek permission to develop certain high-rise buildings in England.

The consultation, which runs until 22 July, seeks views on the design, implementation and administration of the new tax and closes on 22 July 2021.

The tax would apply to stand-alone companies and groups that carry on residential development activities and generate profits in excess of £25m per year.

It is intended that the definition of residential property used would be the same as for stamp duty land tax but extended to include any undeveloped land, or land undergoing a change in use, for which planning permission to construct residential property has been obtained.

The government proposes to adopt a wide definition of “property development”, including all stages from land acquisition to marketing of finished developments. However, companies whose activities are wholly unconnected to UK residential property development would be outside the scope of the tax.

The consultation sets out two alternative models for recognising the profits subject to tax.

Model 1: the tax would apply to stand-alone or companies within groups that directly or indirectly carry on more than an insignificant amount of residential property development activity as part of their overall activity. The whole of that company’s profits would be subject to tax, including that arising from other activities. The tax would be applied to the profits of those companies as computed for corporation tax purposes, with some adjustments

Model 2: only the profits relating to residential property activities would be taxed. These would either be calculated using corporation tax calculation principles, as in model 1, or based on the consolidated accounting measure of profit computed in line with UK GAAP with the residential property development activity as a separate division. Only profits in relation to residential property development, and activities related to said development within the same group of companies would be subject to the tax.

The tax would apply to any profits earned over the annual threshold per company or group of £25m. The rate of tax will be considered once the final design of the tax is clearer. Principles which will be considered when setting the initial rate include:

• The rate should be proportionate and considered in the context of the increase in corporation tax to 25% in 2023.
• The tax should raise at least £2bn over a 10-year period.
• The tax should not have a disproportionate impact on housing supply, or other government objectives on housing.