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Construction, Land and Property

Revalued property assets held by companies and the impact on deferred tax


Following the reversal of many of the measures announced in the recent fiscal event, the increase in corporation tax rate for many businesses which was due to come into effect in April 2023 and take the headline rate up to 25% is still coming.

Whilst that change might not have an immediate impact in terms of tax payable, for many who hold properties within their business(es), it may well have accounting implications to consider further.

Where a business holds investment property on its balance sheet and it is not a micro company preparing accounts under FRS105, it must carry that investment property at fair value. This effectively means the value of each property must be considered at each balance sheet date, and any material increase or decrease in value is reflected through the profit and loss account, and increases or decreases the carrying value of the asset on the company balance sheet. Assuming the value has increased, in those same circumstances described, the company must also then consider the deferred tax that would arise should they sell the property at that higher amount. This is provided for as a provision on the company’s balance sheet, though is not payable to HMRC. It essentially accounts for the timing difference between recognising the increase in value as a gain, without crystallising any tax payable.

Similar deferred tax provisions also arise where trading properties are held at valuation rather than historic cost, which is an accounting policy choice. Where movements relate to this type of property, they would tend to then flow through Other Comprehensive Income (OCI) rather than on the face of the profit and loss account.

Despite recent mixed messaging from the government around tax rates, the headline rate of corporation tax will increase to 25% from April 2023 and as such this remains the ‘substantively enacted rate’ used to calculate deferred tax provisions. Once the Finance Bill 2021 had passed through the Commons on 24 May 2021, the substantively enacted rate changed to 25%. Therefore, effectively most companies with May 2021 year ends and later should have recalculated the deferred tax provision on the basis of the 25% rate, with many reflecting a substantially higher closing provision.

What becomes equally important, is to ensure that carrying values remain appropriate in the current environment and that properties are being carried at the correct fair value where applicable.

Now that this substantial tax rate change is going to be fast upon us, the timing of any disposals should be considered and planned accordingly where possible. Depending on individual circumstances and options available, it may be possible to mitigate the additional 6% tax payable on a disposal.

Timing aside, if you have such a disposal on the horizon there are a number of questions to consider, so that you are fully prepared in advance of a transaction;

  • Do I understand the base cost and the gain that may arise?
  • Is there any relief available?
  • Have I thought about pooled allowances, historic allowance claims, etc?
  • Are there any VAT considerations or unintended consequences?
  • What impact does this have on my balance sheet and my finance arrangements?

Each scenario will come with different connotations and such disposals need to be planned with more than just tax in mind.

If you would like to discuss your particular circumstances with us please contact Michael Breame or your usual Rickard Luckin contact, who will be able to advise further.

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