Legal

There is no longer a role for the private sector in urban regeneration schemes. Registered social landlords can go it alone. They know how to build houses, they have brought (or perhaps bought) in staff with private sector experience, they can borrow at next to nothing (0.25% above base interest rates) and some have balance sheets of £1bn to support their borrowings. They can outbid housebuilders for land as they fund their purchases with the staircasing receipts they receive from shared ownership housing (in other words, they can over-pay for the land by recycling government subsidy).

Rubbish, say housebuilders: RSLs are inefficient and bureaucratic. They know little about what sells on the open market as they have always been spoiled by having waiting lists of purchasers for shared ownership units, often nominated by the local authority. Much better for RSLs to stick to social rented and shared ownership housing and leave build for market sale to the housebuilders.

RSLs and market sale

The "who is best?" debate will doubtless continue, but as RSLs are voluntary organisations, funded by government and often charities, is it lawful or proper for them to get involved in housing for market sale at all?

The permitted objects of RSLs are broadly any activity connected with housing except build for market sale. However, regeneration is a permitted object, so to the extent that housing for market sale is undertaken as part of a regeneration project, it is permitted.

However, many RSLs are also charities. Build for market sale cannot be a charitable activity, because charitable housing is precisely housing for those who cannot afford to house themselves on the open market.

The lawyers' view

Lawyers will tell you that a charitable RSL can do some housing for market sale as part of a regeneration scheme, but only to the extent that it is incidental to its charitable activities. For example, if an RSL needs to sell 25 homes on the open market to cross subsidise a 100 home affordable housing project, the market sale housing is probably incidental to the charitable scheme. However, as is increasingly common, if a scheme consists of, say, 600 market homes and 300 affordable homes, an RSL's charitable status will prevent it from undertaking the market sale housing on this scale.

The accountants' view

Increasingly the larger RSLs have an appetite for greater control and greater risk with more reward

This is what lawyers say. However, accountants will tell you that the Inland Revenue's view of "incidental" charitable activities differs from that of the Charity Commission. In the above example, the RSL would have to pay corporation tax on the 25 market homes, as this activity is not charitable.

Worse still, the Inland Revenue does not recognise "mixed" trades in these circumstances (in other words, it will not treat the charitable activities separately from the non-charitable ones). This means that the 25 market homes could "pollute" not only the scheme in question, but all of the RSL's trading activities so tax becomes payable on all of the RSL's surpluses, even those derived from charitable activities.

Possible solutions

So, how do RSLs get around these legal and tax hurdles? Broadly, there are two ways. The first is that they sell the land for the market housing to a developer. The developer builds and sells the market homes and, in addition to the purchase price, pays the RSL a share of the profits by way of an overage payment. This structure has the benefit of simplicity and it moves the risk of the market housing from the RSL to the developer. The down side of this structure is that the RSL has little control over the market housing elements of the scheme and, by passing the risk to the developer, has to forego much of the profit.

Increasingly the larger RSLs have an appetite for greater control and greater risk with more reward. For legal and tax purposes, not to mention ring-fencing of risk, RSLs now tend to carry out any serious levels of market housing in non-RSL subsidiary organisations that are often set up for the purpose. Sometimes, these activities are carried out in a wholly owned subsidiary of the RSL and sometimes in a joint venture company with the developer.

The role of subsidiaries

Typically the RSL transfers the land and maybe some cash into its subsidiary or the joint venture company. In legal terms the RSL justifies its injection of land or cash into the subsidiary or joint venture company as an investment. As the RSL cannot itself undertake market sale housing, it cannot support that activity other than as an investment.

The RSL shares in the risk of the market housing, such as a fall in the market, but shares equally in the profits. The subsidiary or joint venture company can gift aid the surpluses to the charitable RSL in the RSL's group, thereby eliminating any liability to corporation tax on the profits. In this way, RSLs are able to compete with private builders for a slice of the action in the housing market.