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Julie Butler FCA considers property values in a difficult market and comments on a recent Inheritance Tax case.

Background

In the current economic climate it is very difficult to define the “fair value” of investment properties.  The matter is made more complicated when the property is under construction.

The disclosure in accounts of investment properties that have been “built” or are about to be built is complex.  There has been a recent change to SSAP 19, as follows:

The guideline has been amended so that properties under construction can be accounted for as investment properties and shown at fair value.  However, investment property under construction can only be carried at fair value prior to 1 January 2009 if its fair value had been determined at that earlier date.  In many cases the historical fair value information will not be available and so the change will only be capable of being applied prospectively.

How difficult will it be to determine fair value?  In this economic climate, there are likely to be more investment properties available and it may be very difficult to define “fair” in the current market conditions.

In Piercy (DWC Piercy’s Executors v HMRC [2008] Sp C 687 (June 2008)), Business Property Relief (BPR) was allowed for Inheritance Tax (IHT) purposes on land that was waiting to be built on by a developer.  For accounts purposes in Piercy the land stock would be shown as trading stock.  The property would have to be valued at the lower of cost and net realisable value at the Balance Sheet date.  Complex considerations as to what a property is worth and how it should be shown will be an ongoing problem for accountants, auditors and tax advisers.

[For further information on this useful case, please see one of Julie Butler's previous TaxationWeb articles: The Tax Advantage of Building on Land as Opposed to Holding Land or Land Dealing - Ed]

The current climate is increasing the need for auditors to consider “going concern” and for banks to pay very close attention to the financial statements,  in order to check that any relevant lending facility criteria are satisfied.

Then amongst all the disclosure concerns, the tax planner has to look to ensure BPR will be achieved on the property.

Conclusion

We live in interesting times and these decisions are not for the “faint hearted”.  There are going to be numerous complexities and priorities of “true and fair” accounts linking to tax planning, and the bank pressure will be huge.

There are tax considerations of accounting disclosure.  The Piercy case was about achieving BPR on trading property temporarily being used as investment property, i.e., property let out whilst planning permission delays etc, prevented sale.

The changes to SSAP 19 and the Piercy case have highlighted the importance of deciding what is an investment property, and when is an asset used in the trade.  These matters are important not just for disclosure but for tax planning purposes.  The matter is more complicated when a property is under construction and even more complicated when looking at the interaction of going concern.