Will the building safety levy constrain housebuilding?

A new tax on the real estate industry risks trading a crisis in building safety for one of housing supply, argue Rick Atha and Amber Wright

The building safety levy is due to come into effect in Autumn 2026, a year later than the government had previously indicated. The government aims to raise around £3.4bn over at least 10 years, ensuring the real estate industry, not leaseholders or taxpayers, meet building safety expenditure. While this objective is laudable, the timing and structure of the levy risks creating unintended consequences for housing supply. The government has set a target to build 1.5m homes this parliament  yet there is growing concern that the levy, even with its delayed implementation, could frustrate that ambition.

What developments are impacted by the levy?

All new dwellings requiring a building control application in England will be subject to the levy, including purpose-built student accommodation, the build-to-rent sector, independent retirement communities, housing with care (and similar) and age-restricted general market housing.

Certain residential buildings providing ‘important community facilities’ and certain communal accommodation are exempt, for example, affordable housing, non-social homes built by not-for-profit registered providers and NHS hospitals.

To protect smaller businesses, developments of fewer than 10 units are exempt. The government also intends to include several other exemptions, including hotels. 

How will it impact housebuilding?

The Department for Levelling Up, Housing and Communities in its response to the most recent technical consultation on the levy, stated they were aware that “the levy may have a small impact on housing supply, particularly in areas where sites are already close to the viability threshold”. However, the response says this is mitigated by implementing different levy rates in each local authority area. In addition, developments built on previously developed land (PDL) known as ‘brownfield’ will receive a 50 per cent discount to levy rates.

The levy charge will depend on floorspace, with rates per square metre set for each local authority to reflect house price variations. Levy rates have been published in the response and range from £100.35 for non-PDL in Kensington and Chelsea (£50.17 for PDL) to £12.70 for non-PDL in County Durham (£6.35 for PDL). But even with geographic variation, the blanket rate per authority fails to reflect the more granular viability challenges. This one-size-fits-all approach is too blunt a tool for such a sensitive issue, especially in London, where home prices can vary wildly. 

Including communal areas in the levy charge will disproportionately impact developments like flats and build-to-rent, which play a vital role in modern urban living

Certain developments may be more adversely impacted by the levy than others. The response confirms that in calculating the floorspace, communal areas will be subject to the levy charge. Some respondents to the consultation raised concerns that this would have a disproportionate impact on developments with a higher proportion of communal spaces, such as flats, build-to-rent properties and integrated retirement communities, which play a vital role in modern urban living. Penalising such developments risks reducing liveability and social cohesion in new communities. The local authority will be tasked with collecting the levy even where building control approval is through the Building Safety Regulator or a Registered Building Control Approver. The government does not intend for the payment of the levy to be phased or staged. The levy must be paid in full prior to applying for the first completion or final certificate for the works under the application or notice. This inflexible approach could stall phased developments entirely, as developers may struggle to front-load capital commitments before revenue generation begins.

The levy’s impact on the government’s ambitious housebuilding targets remains uncertain — but it is increasingly hard to see how it won’t act as a drag. It may lead to an increase in house prices or land prices may have to fall to make developments viable and may well also affect speed of delivery when the levy has to be factored into development capital commitments and cash flow. 

With regulations still to be finalised, the government has an opportunity — and a responsibility — to ensure this levy doesn’t trade one crisis (building safety) for another (housing supply). The real estate industry will be watching closely.

Rick Atha is a partner in the real estate team and Amber Wright is a professional support lawyer at Shoosmiths