Depreciation on development of freehold property

Depreciation on development of freehold property

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I have a client who has traded as a cinema for many years. The freehold property is included in the accounts at a cost of £145,257 and accumulated depreciation of £41,491. During the last year the cinema was developed into five flats. As no tax relief has been obtained on the freehold property depreciation, I want to use the original purchase price of the cinema as part of the development costs. What should I do with the accumulated depreciation in the accounts?

Thank you very much!

Jane 

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By Tim 59
11th Aug 2015 15:01

Your question raises several issues. The accounting treatment may have considerable influence on the tax treatment. Your client's trade was that of a cinema operator which has ceased. On cessation, dependent on the facts and the client's intention, the cinema could be treated as being transferred to a new trade; property developer. Alternatively an investment business. Your question does not refer to whether all the flats were sold or any retained for rental income and/or ground rents.

The transfer of the building to trading stock TCGA1992  S161 (1 and 2) is treated as disposed of at its open market value with the consequent taxable gain or loss. (There is a further election available to have the gain or loss treated a trading gain or loss).

You may wish to show the revaluation to market value, thereby extinguishing depreciation followed by the transfer to stock or investment property as appropriate. HMRC will carefully consider your accounting treatment when reviewing the tax computations.

When preparing your tax computations you need to consider more than just the original cost deduction. If your client is an incorporated entity indexation will be relevant.

 

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Replying to Ivor Windybottom:
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By Janeclar
11th Aug 2015 15:09

Thank you very much for your help!

The timing was perfect, as I need to sort these accounts this week!

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