30 January 2019
A large number of property groups in the UK, in addition to holding properties for long term rental, buy and sell properties frequently. They do this for the purposes of gaining a profit on such transactions and are commonly known and disclosed as ‘dealing stock’. Quite often, the company may rent out such properties whilst it aims to sell them.
The rules in detail
According to UK accounting standards (FRS102), if a company buys and sells property frequently enough, it is permitted to reflect these within its balance sheet as a current asset and at historical cost (essentially, the price that was actually paid).
If, however, the directors are not actively marketing these properties, but are instead holding them for their long term rental income, accounting standards require that these should be transferred to investment assets within the fixed assets section of the balance sheet. The point at which this transfer should occur is when the directors’ intention around these properties changes.
A significant tax liability
If these properties are now deemed to be investment properties, they should be reflected at their current market valuation. This transfer also has the unfortunate effect of triggering a gain for corporation tax purposes and a tax liability arises on such a transfer. Given that there may be a significant difference between book value and market value, this could result in a significant amount that is owed to HMRC.
In order to ensure that companies do not fall into this trap, it is important that they actively market, and enter into real discussions about disposals, so that they can continue to reflect these properties as ‘dealing stock’. It is also essential that records are kept of all such discussions so that you can demonstrate that you are actively marketing such properties.