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TCGA 1992 s161

Company has investment property that has halved in value. An impairment provision will have no effect on the tax position. But what if the company were to decide to develop the property, and so appopriate it to trading stock under a s161 election? Effect would be to transfer asset into stock at cost, but if a provision were then made against stock value would this provision be allowable as a trade deduction? I'm aware of the knock-on consequences on eventual sale, but client is concerned only about the immediate position.


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27th Apr 2012 13:45

Selling it eventually

Surely, whether an asset has been transferred to trading stock is a question of fact.

There's no need to have anti-avoidance for this fact pattern.  Where it might come unstuck is if the asset were "transferred to trading stock" with no actual development taking place.

But yes.  An item of stock should be written down to it's net realisable value (it's expected sales value after development, less the costs of marketing it and disposing of it, less the estimated development costs).  It's a different calculation to a fixed asset impairment based on value though.  Such a write down will be deductible from the profits of the development business and any losses from the development business can be set against the company's total profits.

However, the starting point for calculation profits and losses is UK GAAP.  Assets don't suddenly halve in value overnight, so I'd have expected there to be a point at which impairment should have been considered previous to such a transfer.  My guess would also be that the net realisable of the asset (as defined in SSAP 9) would be higher than the recoverable amount (as defined in FRS 11).

So you could face an argument with HMRC's accountants.

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